I have $65,000 that I need to invest but I want to make more than the bank is offering. Where can get a high return on a short-term investment with limited risk?
<Sigh.>
This exact question was asked of me just the other day.
You would be surprised how often I get asked something similar. It has definitely been more times than I can count!
We’re in an eventful time where the stock market is behaving like a schizophrenic and interest rates are at record lows – again. (I’ve refinanced my house twice!)
Low mortgage rates are great, but how do you actually make money in the short-term?
In such an unstable market, short term investing may be a safer alternative for investors. Short-term investing allows investors to invest their money with little or no risk, while knowing their money is not going to be tied up for long periods of time.
The typical short-term investment is expected to grow for several months, or a few years, and can be turned into cash or other short term investments when they reach maturity. (In the investing world, “long term” investments are really long term — often decades — which leaves room for short-term investments that can still last several years.)
Before I share the best short-term investments for your money, I first want to share where not to put your money: the stock market.
This can mean individual stocks, mutual funds, ETF’s – whatever. If you know you need the money back in the short-term, the stock market is the last place you need to be.
Even if you think the market is down or your eyeballing a stock that has recently spiked lower than usual – it’s not worth it.
Too much can happen in the short-term that can wipe out your principal with little time recover.
Capisce?
Peer to Peer Lending
Peer-to-peer lending websites allow investors to broaden their investment portfolio by spreading out the investments and reducing their risk. These websites work as tools to connect investors to qualified consumers in need of a loan and allow investors to become the bank, providing a small percentage of multiple borrowers’ loans. Investors purchase notes and receive a monthly income in the form of loan repayment and interest. In the end, this can easily be a win-win for everyone involved.
1a. Lending Club
Lending Club sets the interest rate on notes based on specific credit criteria. And since they only accept desirable borrowers, they dramatically reduce the risk for default and potential losses for the lenders. Lenders may start out small and increase the amount of money they are willing to lend as their confidence in the company grows. Lending Club offers loans from a few hundred dollars to over $10,000; how much you should invest depends on the level of risk you’re comfortable with as well as your investment timeline.
Here’s a video that walk you through the Lending Club investment process. You can also see my review post on Lending Club.
1b. Prosper
Prosper does not set a specific interest rate for borrowers. Instead, the website connects borrowers and lenders through online auction-style bidding. This set-up allows lenders to be more in control of their monthly income since they only accept interest rates they are comfortable with.
Borrowers list their loan and the highest amount of interest they are willing to pay. After that, lenders bid the interest rate down based on the lowest amount of interest they are willing to accept. This feature provides the stability of a predictable, high yield income on the notes.
If you need more info, check out our review post on investing with Prosper.
2. Cash Back Rewards Offers
While pursuing rewards may not automatically come to mind when you think of short-term investments, the signup bonuses credit cards offer can actually be extremely lucrative. However, your “earnings” will be based on your spending instead of the dollars you invest.
Here’s how it works: Let’s say you signed up for the Chase Sapphire Preferred® card in order to score the huge signup bonus. The current offer will award you with 50,000 points worth $500 after you spend $4,000 on the card with 90 days. And since the $95 annual fee is waived the first year, you can earn this bonus without paying anything out of-pocket to do so. Are you with me so far?
To make the most of an offer like this one, you’ll want to meet the minimum spending requirement with stuff you were going to buy anyway. Think groceries, gas, and your regularly monthly bills. Then you’ll simply pay off your card right away to avoid credit card interest. It’s as simple as that.
The thing is, there are so many ways you can spend 50,000 Chase Ultimate Rewards points. For example, you could book $625 in travel through the Chase travel portal – that’s more than enough for a round-trip flight! Conversely, you could turn in those same 50,000 points for a $500 statement credit or $500 in gift cards.
Plenty of people even leverage the value of Chase Ultimate Rewards points and similar rewards currencies to travel the world, earn a steady stream of cash, or treat themselves once in a while. Once you start earning, the sky is the limit.
Learn more about the Chase Sapphire Preferred® card and its huge signup bonus, then get ready to earn some easy cash in the short-term. Also check out some of our top cash back offers in terms of “bang for your buck”:
Chase Freedom® – This card offers a sweet $150 bonus after you spend just $500 on your card within the first 90 days. Simply charge a few monthly bills, your groceries, or your utilities and you’ll score a $150 statement credit in no time. Best of all, this card will never charge an annual fee. In terms of short-term investments, there is almost no way to earn an easier $150 than this. Read here to learn more about the Chase Freedom® card.
Blue Cash Preferred® Card from American Express – This card offers an easy $150 signup bonus if you’re able to spend $1,000 on your card with 90 days. Plus, you’ll earn 6x points on your first $5,000 in grocery spending your first year, which is the highest rate of any other card out there! If you’re after easy money in the short-term, it really doesn’t get any better than this. Read here to learn more about the Blue Cash Preferred® Card from American Express.
Short-Term Investment Account Options
Here’s what you need to know about the various short-term investment accounts available to you:
3a. Online Savings Accounts
Want to guarantee your investment will not lose any money while at the same time generating a little bit of a return? An online savings account is a great fit for that goal.
In using this account for short term, investing you’ll get:
- Guarantee to never lose principal on your investment as long as you keep your total deposit at the bank below FDIC coverage of $250,000. Deposit your money and walk away knowing that it will be there when you’re ready to cash out.
- A small, risk-free return on your investment. Current interest rates are very low, and those low returns mean you won’t earn a lot of interest for the time being. For now, it won’t be enough to keep up with inflation. However, online savings accounts do offer a risk-free return you will never have to lose sleep over.
- High liquidity. Most of the high quality online banks allow 6 withdrawals per month from savings accounts. In other words, you can generally cash out your funds at any time without much hassle or expense involved. Meanwhile, you won’t have to worry about forking over part of your profits to sell your investment since it is safely tucked away in a low-risk savings account.
In using this account for short term investing you’ll miss out on:
- Potential higher returns from other types of investments. Since online savings accounts aren’t offering the best interest rates right now, you could potentially do better by putting your money elsewhere. However, that would require more risk, too, which is something you’ll want to avoid when it comes to short-term investing.
Not sure where to start? The best online savings accounts are available at online banks like Capital One 360.
3b. Online Checking Accounts
Just like online savings accounts, an online checking account can also serve short-term investment needs. You get many of the benefits of an online savings account with even more liquidity because the number of withdrawals isn’t limited. Since you would be storing your money in a checking account rather than a savings account, you do take a hit on the interest rate. Unfortunately (or fortunately!) interest rates are so low that the difference isn’t as significant as it could be. In using this account for short-term investing you’ll get:
- A guarantee to never lose principal on your investment as long as you keep your total deposit at the bank below FDIC coverage of $250,000.
- A small, risk-free return on your investment. Current online checking interest rates are very low. You probably won’t earn enough to keep up with inflation, but it is a risk-free return.
- Extremely high liquidity. You get unlimited withdrawals via transfer, debit card, or ATM use with online checking accounts. Get your money out at any time without paying a fee as long as you use a no-fee ATM.
- A hassle-free investment – Even though you don’t earn a lot of interest with this strategy, you won’t have to endure much of a hassle, either. Opening an online checking account is a fairly painless process that won’t stress you out or take up too much of your time.
In using this account for short-term investing you’ll miss out on:
- Potential higher returns from other types of investments, including savings accounts if you don’t need daily access to the money. When you park your money in a checking account, you miss out on higher returns elsewhere.
Looking for an online checking account? Check out the best online checking accounts currently available from Compass Bank and Capital One 360.
4. A Roth IRA
I know what you’re thinking, “Jeff, the Roth IRA is NOT an investment.” Trust me, I totally get it. But let me explain why one of my favorite retirement accounts also can work as a short term investing account. With all other types of retirement accounts — from 401ks to Traditional IRAs — you get hit with an early withdrawal penalty and income tax if you withdraw funds before retirement .
The Roth IRA is different. Since you fund your Roth with after-tax income, you are free to withdraw any contributions (not earnings on those contributions) at any time you want. It isn’t recommended because you would much rather the money stay invested, but it does give you the option to set money aside for retirement now but withdraw it if times got tough. I have seen far too many people not save enough for retirement, and pay heavily for it in their later years. Funding your Roth IRA allows to get a huge head start on this. In using this account for short term investing you’ll get:
- The ability to withdraw funds. Transfers take a few days and you may have to sell investments at inopportune times in order to cash out. However, the fact that you can take your actual contributions out without a penalty does stand out as a huge benefit.
- Potentially higher rates of return. With a Roth IRA, you get access to other types of investments like mutual funds, ETFs, and bonds to earn a higher rate of return. If the market does well while dollars are invested, you can secure healthy returns and profit from your investment.
In using this account for short term investing you’ll miss out on:
- Risk-free returns. When you invest your money into stocks, bonds, mutual funds, and ETFs you are accepting risk for a potentially higher return.
- FDIC coverage. If your brokerage fails you will be able to file a claim with SIPC coverage, but it won’t cover investment losses — just losses from the failure of your broker. (That’s why it is so important to find a great place to open your Roth IRA.)
Just remember, if you think you need you’re money in the short-term, avoid the stock market for now. If you realize that part of the money can now go towards retirement, then you can shift it over. Think opening a Roth IRA is complicated? We’ve told you the best places to open a Roth IRA in the past. Brokerage firms like Scottrade and E*Trade are great and also have lots of options to choose from.
In summary, a Roth IRA can provide a solution for individuals who crave the potential for higher returns but want the ability to withdraw their contributions if the really needed to.
5. Money Market Account
Money Markets are currently paying a very close APY to one year CD’s. Investors familiar with the discipline of owning a CD can earn a similar return with a Money Market and still have immediate access to their funds.
Money Market accounts provide depositors with ATM cards, checks and deposit slips. Money Market accounts are based on the account balance, not the length of time you invest your money. When CD rates begin to rise, clients can move their money from the Money Market without paying a penalty for early withdrawal.
All of these factors combined are why many people consider money market accounts as a type of “savings account on steroids.” While there isn’t much risk involved, you can potentially secure a higher rate of return.
Looking for an online bank that does Money Market Accounts? Compass Bank is a great choice.
Short-Term Investment Options
Here are some investments you could use with the above accounts.
6. Short-Term Bond Funds and ETFs
Short-term bond funds are products that are usually only managed by a professional financial advisor. Bonds are not as stable as money markets, but they do offer the potential to earn a higher yield. These bonds are a product of the market and will pay out according to the market’s current condition in fluctuating monthly payments. Short-term bonds usually mature in terms within 2 years or less, which can make them an ideal choice for investors with that type of timeline. You’ll need a brokerage account like Scottrade or E*Trade to be able to trade bond funds and ETFs.
7. Certificate of Deposits (CD’s)
Banks offer a variety of terms for their deposit accounts, ranging from 3 months to 5 years. Which length of CD will work best for you depends on your timeline and how long you want your investment out of your hands. CD’s allow depositors to invest their cash for a specific length of time. The longer the term of investment, the higher the yield will be. A client wishing to receive monthly interest payments can elect to do so at the time of application. However, most individuals who buy CDs let the interest accrue until the CD matures.
The only downside to a Certificate of Deposit is the fact that, if you need to pull money out before the maturity date, you will pay a fee. The fee is usually equivalent to 3 months worth of interest, and that can take a huge bite out of your earnings. You can get the highest interest rates for Certificates of Deposit at online banks like Compass Bank and Discover Bank.
Short-Term Bonds
There are three main short-term investments within the bond category, and each is one you could consider.
8. 5-Year Treasury Inflation Protected Securities
Treasury Inflation Protected Securities, also known as TIPS, are government bonds that are indexed to inflation. The interest rate on a TIPS is fixed, but the underlying value of the security rises with inflation as measured through the Consumer Price Index.
You might only get 0.5% in interest (paid semiannually), but over 5 years the value of the bond might increase 2.5% per year. The end result is, at the end of the term, your initial investment will be worth as much as it was when you first invested. However, you will earn a small bit of interest on top of it.
You can buy TIPS directly from the government at TreasuryDirect.gov. However, due to TIPS interest being taxable, most investors prefer to invest in a TIPS ETF or mutual fund. To purchase shares of an ETF or mutual fund you will need a brokerage account. Again, Scottrade or E*Trade are good places to start if you want to open a new brokerage account.
9. Municipal Bonds and Corporate Bonds
Municipal bonds are slightly more risky than TIPS and other Treasury investments, yet a majority of municipalities do not default on their bonds. The more significant risk is “interest rate risk.” In a low interest rate environment, if rates rise in the marketplace, the value of the bond decreases to compensate.
If you could get 4% on a municipal bond today, that’s a great return. But if rates go up and your bond loses 6% of its value, you’re suddenly on the losing side of the equation. However, the decrease in the value of the bond only impacts you if you sell before maturity. If you hold the bond to maturity you will get 100% of your initial investment back plus the interest yielded to you.
If you’re looking for short-term investments, you could buy a bond from someone else that was closer to maturity through a major brokerage firm.
Likewise, corporate bonds are even more risky than municipals and Treasury bonds because they are not backed by a state, local, or Federal government. As always, increased risk can mean an increase in your rate of return. The same interest rate risk issue applies to corporate bonds; holding to maturity will eliminate this one piece of risk.
Where to Buy Individual Bonds?
You’ll need a brokerage account like Scottrade or E*Trade to be able to trade individual bonds, bond mutual funds, and bond ETFs.
10. Pay Off High Interest Debt
Looking for a great return on your investment? Pay off your high interest debt. If you have a credit card with a 15% interest rate carrying a $10,000 balance you have an opportunity for a great return on your investment. If you pay off that debt it is like getting a 15% return on $10,000.
There are few investments that will earn the high returns of paying off debt. Not only are you getting a great return on investment, you’re saving money from future costs and bettering your overall financial situation. It’s the ultimate win-win.
You can pay off high interest debt on your own. However, financial tools like Mint can help you manage your finances so you can see what kind of an impact your debt payoff is having.
Even better, you can transfer your high interest balance to a 0% APR balance transfer card to speed up the process. With these offers, you literally transfer your balance from one card to the next in order to score 0% APR for anywhere from 12-21 months. If you’re paying a lot of interest right now, going through with a balance transfer can improve your finances and get you out of debt that much faster.
Have high interest debt? Consider these two offers:
Chase Slate® – The Chase Slate® card offers the best deal for balance transfers on the market. Not only do you get 15 months at 0% APR, but you can transfer balances with no balance transfer fees for the first 60 days. If you’re paying high interest rates on existing debts, consider how much money you could save if you paid no interest for 15 months. You might even be able to use those 15 months to get out of debt for good! Read here to learn more about the Chase Slate® card.
Citi Diamond Preferred® Card – The Citi Diamond Preferred® Card offers the longest 0% APR card on the market. After you sign up, you’ll get 21 full months with 0% APR on purchases and balance transfers! That’s almost two full years to pay down your high interest debts without paying interest at all. If you’re struggling to pay down high interest debts, you could save tons of money by transferring your balance. Read here for more details about the Citi Diamond Preferred® Card.
The Bottom Line
If you’re looking for a place to sock away some cash for the short-term, don’t be afraid to think outside of the box. Thanks to the constant evolution of the world wide web, you shouldn’t have trouble investing your funds in any number of innovative online platforms.
As I shared above, however, short-term investing is much different than investing for the long haul. When you need to invest your money for only several weeks or months, you don’t want to pour cash into investments that aren’t easy to liquidate, charge fees for withdrawals, or are too risky for the short-term.
How do you invest your dollars for the short-term? Have you ever used one of the strategies listed above?
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