Maybe you have savings but you’re not quite ready to invest it into the stock market yet, or you’re just sitting on cash in a bank account that’s paying 0%. Either way, you deserve to earn a return on your money. You work really hard for your money, so shouldn’t your money work hard for you too?
That’s why in this blog post, I’m going to show you 5 short-term investment options that pay anywhere from 2% to 18%.
Watch the video below or keep reading!
Inflation is a real thing
I remember a time when a latte used to cost like $3. Now, it’s $5. Not that that’s stopped me from my occasional (ahem… daily) oat milk latte. I also remember what I used to rent out a studio in NYC that cost $2500, now that same place is $3500. Thank god I don’t live in NYC anymore.
Moral of the story? Not enough people consider the effects of inflation, but you SHOULD! That’s why any extra money that you have sitting around that you don’t need for rent and bills in the next month or so, you should try to earn a return on it whenever possible. So that’s where these 5 short-term investments come in!
#1 – High interest savings accounts
The first one is high interest savings accounts. This isn’t really an investment – it’s a bank account, but there are some savings accounts that pay a lot more than the traditional brick and mortar bank. These are called online-only savings accounts.
The best thing about them is that they’re FDIC-insured. Which means that if anything happens to the bank, your money is going to be safe no matter what, because it’s insured by the federal government.
Meaning that they’ll step in and replace the money if anything happens to the bank. There are some good ones that pay up to 2% interest, such as the Betterment savings account and the Wealthfront Cash account.
#2 – Money market mutual funds
The second short-term investment option is money market mutual funds. The money market is a place to park short-term cash. It’s an investment, but it’s very secure.
Examples of money market investments are 1 month, 3 month, 6 month Treasury bond. You’re pretty much guaranteed the return of your principal, plus a little bit of interest, because it’s such a short duration bond.
So a money market mutual fund is a basket of a bunch of these little money market instruments in one easy fund. What’s good about that is that you get the diversification, so your credit risk is spread around many different issuers and bonds. You can often expect around 2% interest – they’ve very similar to high interest savings accounts in terms of what they pay.
However there’s ONE key difference that’s actually really big. The after-tax returns could be a lot better than a savings account. For example, if you put your money into a money market mutual fund that does municipal bonds, then you avoid all taxes. Because municipal bonds (“munis”) are exempt from state tax, city taxes, and federal taxes. Which means, the AFTER-tax return of a money market mutual fund could be better than savings accounts!
Also U.S Treasury money market bond funds also avoid state and city taxes, so you always want to think about what the after-tax return is.
To invest in a money market mutual fund, you need a brokerage account and it’s the same type of account that you would use to buy stocks and bonds. There’s a couple extra steps to invest in money market mutual funds, but especially if taxes are a concern for you. Then money market mutual funds are a great short term investment option.
#3 – P2P Lending
The third short term investment option for you is peer to peer lending on a platform like LendingClub. Peer to peer lending is a type of lending that happens outside of banks where individuals like you can also lend money to individuals like you. The most reputable peer to peer lending platform that I’ve heard of is called LendingClub. And this is a platform where you sign up, you create an account and then you tell them how much money you want to invest and they’ll invest your money in different loans for you.
And all the borrowers on LendingClub are people just like you and they’re just looking for short term personal loans. And all of these loans have $25 denominations. And so if you want to invest say $1,000 which is actually their investment minimum, then your money would be spread out across, what is it? I can’t do the math, shit. What’s the math? 40. So if you have $1,000 to invest in LendingClub, then you would have 40 different notes of $25 each. And this is great because then you’re diversified across 40 different borrowers.
At LendingClub, they say that you can earn anywhere from 4% to 7% returns a year. So this is a pretty juicy return. However, I would only consider LendingClub if you have at least 2,500 to invest. Even though their investment minimum is only $1,000 they recommend even $2,500. Because with $2,500 you get your investments spread out across 100 different notes of $25 each. And they say that just based on historical data and the rate of default of a typical note that you get the best probability of actually earning this %4 to 7% return if you diversify across 100 notes.
So again, I would only consider a LendingClub if you have at least $2,500 to invest. But it’s still a great short term investment option to consider.
#4 – Investing in the stock market with a conservative allocation
And the fourth short term investment option that I have for you is to invest actually in the stock market, but with a very conservative allocation. And this is really easy to do through robo advisors like Betterment, where you tell them how much money you want to invest and when you need that money by and they will invest the money for you in a very conservative portfolio of stocks and bonds. Where most of the money will be in stable bonds, but you’ll have a small percentage say 30% ish in stocks.
So the good thing about this option is that you get some potential upside as their projections say you can make up to 18% on your money. But of course this is all dependent on how the stock market plays out and there is a small chance of you actually ending up with a little less money than you started with if the market timing isn’t ideal for you. So it’s all about probabilities. Of course, the upside is you’ll end up with way more than you would have ended up doing anything else with the money. But you have to be okay with actually taking that small chance of ending up with a little bit less than you started with.
However, that’s not the end of the world, because it’s all about timing. So if in one or two years when you need that money, it’s not where you want it to be. You can just keep it in there longer because as you know, the stock market in the long run always goes up. So it’s not a matter of if, but it’s a question of when your money will grow. I would only do this if you’re flexible on the timing of when you need this short term money. So if you’re okay with, you expect it to use it in two years, but you’re okay with waiting two and a half years, then this could be an interesting option for you.
It’s really up to you. Some people prefer the safety and security of knowing that their principal is always going to stay the same and they’ll just make a little bit of interest and other people prefer to take a little bit of risk and put some money in the stock market so that they can end up with more money than they would’ve ended up with otherwise.
So to do this, I recommend using a robo advisor like Betterment or Ellevest. I actually did a couple of videos on robo advisors, so you can check those out here. But these robo advisors, you just tell them what your time horizon is. One year, two year, it can be really short and they’ll allocate your money into a nice short term investment portfolio.
#5 – Certificates of deposit
And the fifth and final short term investment option for you is certificates of deposits, also known as CDs. CDs have a fixed maturity and they are not as flexible as savings accounts and money market mutual funds and even the Betterment short term stock portfolio that I talked about because they have a locked withdrawal period. Meaning that if you buy say a three month CD, then you cannot withdraw this money until those three months are over. And if you do, you would have to pay hefty, hefty penalties and fees. So it’s just not an option.
So it’s similar to a savings account, but it has a fixed maturity and no liquidity before that. And CDs, you can buy these either through your bank or at a brokerage. And I have found some CDs that are currently paying up to 2.3%. It’s really easy, just Google best CD rates and you’ll find a list of banks that are offering the best ones.
Final Thoughts
So as for my final thoughts, I think it really depends on what you need your short term investment money for, and that will help you decide which of these five options is the best for you. If your money is for an emergency fund, then you need to know that, that money is going to be there and there’s no fluctuation in the principle of value and you also need to know that it’s liquid, meaning that you can withdraw it any time whenever you need it.
In that sense, for an emergency fund, a CD is not ideal because there is fixed withdrawal times and I would say the stock market allocation, the conservative stock market allocation option is not ideal because the stock market will do what it does when it does. I would say for an emergency fund, a good short term investment for that would be either the high interest savings accounts or the money market mutual funds.
And then as for anything else, like if you’re saving up for a big purchase but you just want that money to be building up some interest and returns in the meantime, then something like LendingClub or the Betterment conservative stock allocation, those kinds of things could be an interesting option to look into because best case scenario is you’ll end up with a lot more money than you could’ve ever saved up on your own.
And the worst case scenario is the timing isn’t ideal and you have to wait a little bit longer for the market to recover or further returns to get you to where you want to be.
I know that not everyone is ready to always just dive right into stock market investing right away. So short term investing is a good way to just dip your toes into the financial world. So I hope this video has helped!
