The following article is a guest post written by Bryce from Sane Cents. Bryce writes about everything regarding personal finance, investing, with a specific interest in real estate investing.
You have a little bit of cash laying around, but you don’t like the idea of tying it up for 10+ years? You’re not alone.
It’s tempting to throw your extra money in a simple savings account, where it’s “safe”, and you can access it when needed – whether that be for a car or a down payment on your first home.
That may sound like a good idea initially until you realize that even your “safe” savings account is losing you money with every passing day. Let me explain why.
Most savings accounts these days offer interest rates around 0.6% percent.
Breaking that down, that means that if you had $1,000 sitting in a savings account, you would make $0.60 per year in interest – that’s 5 cents per month!
You might be saying, “Yeah, that might not be much, but at least I made something.”
Mmm, not quite.
The hidden attack on your ROI – Inflation
You see, inflation – the general increase in prices – sits anywhere between 2 and 3 percent annually. That means if you had $1,000 sitting in a savings account, after one year, you actually lost money because your buying power is now only $980.
That measly 60 cents you made in interest, can’t keep up with the $20 you lost due to inflation.
One of the biggest struggles investing in real estate is a large amount of up-front capital required to purchase an investment property. As such, we typically have to scrimp and save for months before we can afford to purchase another rental unit.
Saving money is hard enough on its own, especially when we have inflation working against us too.
Here we are – stuck between wanting to make some money in the meantime to beat inflation, and not having our money tied up for years. When we find a good real estate deal, we need our money to be liquid so we can jump on it quickly, not tied up in a long-term investment deal.
The following are 6 short-term investments my wife and I use (and you can too) to build wealth and kick inflation to the curb.
What is a short-term investment?
When you say the word “investment”, most people think of stocks, bonds, employer-sponsored 401ks, and IRAs.
These types of investments are generally referred to as long-term investment vehicles because they take decades to fully mature before they’ll be cashed out for their intended purposes – such as a 529 savings plan for a child’s college, or a 401k for your own retirement.
Short-term investments typically mature in as little as a few months to a few years.
A good rule of thumb is to ask yourself, “How soon am I going to need this money?” If your answer is “5 years or less”, short-term investments are the way to go.
How much risk is associated with short-term investments?
With any investment, there’s always going to be some risk associated. We want to minimize the risk as much as possible.
The goal here is to make money, not lose it.
Short-term investments are typically riskier than long-term investments, but they’re still a better option than heading to Las Vegas and betting your money on black!
Because our investment takes place over just a few months or years, as opposed to decades, if the market takes a dip (whether that be the stock market, housing market, or similar), there’s less time to recover – hence the higher risk.
Note: This post is for educational purposes only, please speak with a financial advisor for any financial advice! Read full disclosure policy.
The Top 6 Short-Term Investments for Big Returns
Now that we understand the difference between a short-term and long-term investment, let’s take a look at the various ways you can invest your money to maximize those returns.
1. Certificate of Deposit (CD)
Investment Period: Typically 1 to 3 years
Rate of Return: 1-3%
Risk: Very Low
Contrary to how it may sound (pun intended), this isn’t the kind of CD you listen to in the car.
A certificate of deposit (not a compact disc!) is a great way to invest your money for the short-term.
Found at almost any bank or credit union, a certificate of deposit is essentially a short-term loan that you lend to the bank. In return, they’ll give you a fixed interest rate and a specified “maturity” date, at which point you’ll receive your original principal, plus all the interest accumulated.
Below is a table I pulled from a local credit union, showing current interest rates. As you can see, the longer you tie up your money, the greater your return will be.
CD’s have a few tradeoffs. They’re incredibly safe investments because they’re FDIC insured. This means your money is backed by the government, up to $250,000.
The downside, however, is that your investment isn’t liquid. You can’t access these funds before the maturity date comes due, or you’ll likely be hit with a penalty.
Also, you’re locked into a specific interest rate. If rates increase during the time your money is tied up in a CD, your rate doesn’t magically increase. You’re stuck at the initial rate you locked in at the beginning.
For myself personally, I find that “forced investing” works well for me. When my money is locked in and I’m not able to touch it, I’m not tempted to pull it out at the first sign of a market dip, or whenever Ford releases their newest model F-150 (I’m a sucker for pickup trucks). When my money sits and grows, without my intervention, I almost always come out ahead.
I have to admit that CDs aren’t my preferred investment vehicle. While not a bad option per se, the rates of return typically match that of inflation. I might not be losing money, but I’m also not making much either. And the lack of liquidity is a huge downer for me.
2. Money Market Account
Investment Period: No limit
Rate of Return: 1-2%
A money market account, in my opinion, is a much better short-term investment than a CD. In simple terms, it’s a hybrid between a savings account and a checking account.
A money market account works similar to a checking account, in the sense that you can write checks or take withdrawals from it.
So what’s the catch, then? Why doesn’t everyone just use one of these instead of a savings or checking account?
Money market accounts typically require a minimum deposit that people may not meet. They also have tighter restrictions on the number of withdrawals you can take within a given time period.
This, unfortunately, makes them less liquid than a traditional checking account (not by much), but more liquid than a CD.
3. Online Savings Accounts
Investment Period: No limit
Rate of Return: 2.2-2.45%
If either a CD or Money Market Account don’t tickle your fancy, then a High-Interest Online Savings Account is a great short-term investment option.
Online Savings accounts seem to have sprung up within the last few years and are incredibly popular due to the high rate of return (compared to most savings accounts) that you may find at your local bank.
The reason these savings accounts offer such relatively large returns, is they don’t have as much overhead as a traditional institution – there are no buildings to maintain and no utility bills to pay. They don’t have a physical location for you to visit. They’re 100% online.
Ally Savings is one of the largest names in online high-interest savings accounts, offering a whopping 2.2% return. They’ve also been touted as having incredible customer service.
A relatively new kid on the block is CIT Bank, offering returns of 2.45%. While I personally haven’t used these guys before, CIT Bank is a very well-known name in the banking industry, and wouldn’t hesitate even slightly to recommend them as a safe option.
I should clarify and say that a savings account technically doesn’t count as an “investment”. However, with inflation sitting right around 2.4% annually (as of this writing), this is a much better option than simply leaving money in a traditional savings account.
At the very least, your money will be growing at the standard rate of inflation.
4. Municipal Bonds
Investment Period: 1-3 years
Rate of Return: 5%+
Risk: Very Low
Municipal bonds (not to be confused with treasury bonds) are money that you personally lend to a state or county to complete a specific project – think road construction, or to build a school.
What makes municipal bonds (or “munis” for short) so appealing is that they’re exempt from both federal, state, and local taxes. This makes them especially attractive for those in higher-income tax brackets.
Municipal bonds are also an ultra-safe bet, in the sense that default rates over the last 10 years have hovered right around 0.03% — essentially never!
One thing to keep in mind when investing in munis is the fact that they’re susceptible to market rates. As interest rates climb, the value of your municipal bond begins to drop. If interest rates decline, the value of the bond rises as a result. Since long-term municipal bonds are more susceptible to market rate fluctuations, the shorter the term municipal bond, the less risk is associated.
5. Pay off High-Interest Debt
Investment Period: Varies
Rate of Return: 6%-20%+
Have you ever thought of paying off high-interest debt as an investment?
No? Well, think again.
The typical auto loan in the United States ranges between 4-12%. Student loans have similar interest rates. Credit card debt can be as high as 30%!
Let’s say you carry a $5,000 balance on your credit card with an APR of 17%. Paying off that credit card instantly equates to a 17% return on your money, or $850 in one year. Even in the stock market, it’s going to be difficult to find returns like that.
Not only does paying off your debt give you a guaranteed return on your money, it wipes out months or even years of future debt payments, allowing you to further invest that money.
If you have the cash available, I recommend paying off as much debt as possible, though some people prefer to leave some of that as part of their emergency fund. If that’s the case, I recommend you transfer your remaining balance to a 0% APR credit card.
These cards aren’t hard to find, and many companies give you as long as 12 months before they begin charging interest.
Investment Period: 3 months minimum
Rate of Return: 8%-11%
It’s no secret that my wife and I are all-in when it comes to real estate. So it should be no surprise that Fundrise shows up on this list.
Not everyone wants to be a landlord. I don’t fault them for that. (It’s okay. Leave the more juicy returns for us.)
Fundrise allows you to invest in real estate without actually doing any of the work. You put up the money, and they distribute it across dozens of projects to limit your exposure.
I’ve been using the service for a number of months now, and have been really happy with the returns thus far. It truly is a “set it and forget it” type of system. I’ll log in occasionally to check out how I’m doing, but I haven’t disappointed yet.
Fundrise’s website claims annual returns of 8.7-12%. I haven’t been using them an entire year yet, so I can’t quite speak to that yet, but so far, it’s looking promising.
My portfolio is currently distributed across 54 active projects, which helps limit the chances of losing money.
The only downside I’ve seen to Fundrise so far is the lack of liquidity. Should you decide to withdraw your money, it’s not as simple as clicking “Withdraw” on the website. Because your money is actively tied up in actual real estate projects, it may take up to a few months to pull out your money whenever you’re ready to cash out.
If you have something you’re saving for in the near future, this is a great option.
Which is the best short-term investment?
After reading through all these options, which investment turns out the best? Is it as simple as picking the option with the largest returns?
I think it depends heavily on your individual situation and your risk tolerance. The most important factor, in my opinion, is your timeline. How long do you have before you’ll need to access your money?
If you have a savings goal that’s 12-18 months out, you may consider Fundrise or a CD. If you only have 6-8 months before you’ll want to tap into the money, you might go for the High-Interest Savings Account option.
As you can see, short-term investing differs greatly compared to long-term investments. Did you notice there’s no mention of the stock market on this list? Since the goal is not to lose money, investing in the stock market in the short-term is too risky to be on this list.
Whatever route you decide to go, it’s up to you to weigh the pros and cons, how easily you want to be able to access your money and find something that’s not too risky for your short-term wealth goals.
Did I miss your favorite short-term investment option? Share with us and comment below!