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Building wealth is a multi-faceted journey that requires balancing different financial goals at the same time. For example, you may be investing for retirement, stashing away money for a new kitchen and saving for college in a 529 savings plan all at once.
Fortunately, there’s nothing wrong with saving to reach varying goals and objectives throughout your life. In fact, doing so is the best way to ensure you reach all your goals in the first place. You just have to approach different savings goals with different methods, and make sure you’re using the right investments when you’re investing for the short term, so that you aren’t putting money at risk that you may need soon.
Short-term investments are designed to help you grow your money for a short period of time without risking a loss of your principal. These types of investments are typically geared to buckets of money you need to access in the next month or year. In some cases, a short-term investment might be used for a somewhat longer period, such as five years, but your timeline can vary.
When it comes to short-term investments, most people look for options that have these attributes:
- Decent liquidity, meaning you can easily and quickly access your money when you need it
- Stability, which means you’re unlikely to lose any part of your initial investment
- Low transaction costs, which help you keep more of your earnings
When you choose a short-term investment, you typically have to accept lower investment returns. That’s because short-term investments require assuming a lower level of risk in order to be relatively certain that you won’t lose your principal. But the downside of this strategy is that you won’t be able to grow your wealth quite as fast.
Yet, you’ll sleep better at night knowing your short-term investments are unlikely to lose money. This part is important if you’re saving up the down payment for a home or investing your emergency fund. You may need to access this money in the near future, and you don’t want to lose even a portion of it in the interim.
The best short-term investments of 2022 can help keep your money safe until you need it. However, some come with more risk than others in exchange for a higher potential return. Let’s take a look at the details of the most common short-term investment options.
Pros:
- An interest-bearing account that lets you grow your savings
- Many online savings accounts don’t charge any fees
- Very liquid, so it’s easy to cash in your investment quickly
Cons:
- Investment returns are on the low side
If you want to earn interest on your savings over the next few months or years and don’t want to risk losing any of the principal, consider online savings accounts from companies like Citi, CIT Bank, American Express and Marcus Goldman Sachs. With the Citi Accelerate Savings Account, for example, you can earn 12 times the national average on your deposits with no account minimums required.
While returns on “high-yield” savings accounts are paltry right now due to our low-interest environment, online savings accounts offer FDIC insurance, which means your money is protected, and they are easy to set up from the comfort of your home. Not only that, but online savings accounts are very liquid, so you can access your cash without jumping through any hoops.
Pros:
- An interest-bearing account that lets you grow your savings
- Many money market accounts don’t charge any fees
- Money market accounts come with FDIC insurance
- Very liquid, so it’s easy to cash in your investment quickly
Cons:
- Investment returns can be on the low side
Money market accounts work similarly to high-yield savings accounts, although they typically offer slightly higher investment returns coupled with a higher starting investment amount. Money market funds are also highly liquid, so you can get your money when you need it for any reason.
Just keep in mind that money market accounts are different from money market mutual funds. The latter invests in short-term securities like Treasurys, municipal and corporate debt and bank debt securities. This means you have the potential for higher returns, yet you’ll also pay an expense ratio. Separately, it’s worth noting that unlike money market accounts, money market mutual funds are not FDIC-insured.
Pros:
- An interest-bearing account that lets you earn interest on crypto assets
- Some crypto savings accounts don’t charge any fees
- Decent liquidity, meaning you can get your money out, but there could be downsides to doing it quickly
Cons:
- Crypto assets can be extremely volatile
- No FDIC insurance
If you have a portfolio of cryptocurrency, you may be surprised to know you could be earning interest on those assets. With a BlockFi Interest Account, for example, you can earn up to a 9.5% Annual Percentage Yield (APY) on your crypto deposits depending on the currency you have.
There are no hidden fees and no minimum balance requirements with this type of account from BlockFi. With that being said, it’s important to note that crypto savings accounts lack FDIC insurance, so there’s no protection for your money if the worst case scenario plays out. Crypto assets are also prone to theft, so you’ll want to make sure you protect your account with multi-factor authentication and other security features if you go this route.
Finally, you should note that cryptocurrencies are extremely volatile, so your digital assets themselves may fluctuate wildly in value. However, a crypto savings account can help you earn interest on your crypto when you wouldn’t get any investment returns (outside of growth) otherwise.
Pros:
- An interest-bearing account that lets you grow your savings
- Low transaction fees
- Comes with FDIC insurance
- Decent liquidity, meaning you can get your money out, but there could be downsides to doing it quickly
Cons:
- Early withdrawal penalties
Certificates of Deposit (CDs) are offered by traditional and online banks, and they let you earn a higher investment return than traditional savings accounts. However, CDs do require you to lock up your money for a specific amount of time — usually anywhere from three months to five or ten years.
Either way, the bank will pay interest on your CD funds regularly, and you can receive your initial investment plus all the interest you earn at the end of the term. You can also access your CD funds early if you need to, but keep in mind that you’ll be charged a penalty if you do so.
Pros:
- An interest-bearing account that lets you grow your savings
- Many money management accounts come without any fees
- Comes with FDIC insurance
- Very liquid, so it’s easy to cash in your investment quickly
Cons:
- Typically offer lower investment returns than high-yield savings accounts
Cash management accounts are offered through robo-advisors like SoFi, Wealthfront and Betterment. With the SoFi Money account, for example, you get to earn a higher investment return than traditional savings accounts offer, and you can access your cash for free at more than 55,000 ATMs. SoFi Money also comes with no monthly fees, no overdraft fees, no minimum balance fees.
Some cash management accounts even offer a welcome bonus when you make a deposit and keep it in your account for a minimum amount of time.
Pros:
- Earn a great investment return on your savings
- Minimum purchase of $25 to $50
- Tax benefits
Cons:
- Need to keep your money deposited for at least one year
- Maximum purchase of $10,000 per person each calendar year
- Penalties if you cash them in before five years
Individuals can invest up to $10,000 each in Series I Savings Bonds every calendar year, which are issued by the US Department of the Treasury. The current return on I-Bonds is an impressive 7.12%, and individuals can cash in their account any time between one year and 30 years. However, cashing these bond funds before five years results in a penalty of three months of interest. So if you hold I-Bonds for 24 months, for example, you would get your principal back plus 21 months of investment returns.
Interest is earned on I-Bonds every month, and the interest is compounded semi-annually. Also note that I-Bonds are taxed at the federal level, but you won’t typically have to pay state or local taxes on these investment returns.
Pros:
- Potential for higher investment returns
- Tax advantages in retirement
- Access your contributions penalty-free at any time
Cons:
- Profits aren’t guaranteed
- You can lose money depending on the investments you choose
- Low annual contribution limits
- While contributions can be withdrawn at any time, in most cases earnings can only be withdrawn without a penalty after age 59½.
While the Roth IRA was initially envisioned as a tool to help people save for retirement, the fact you can withdraw contributions penalty-free at any time makes it a good option for short-term investing. After all, you can contribute up to $6,000 in after-tax dollars to a Roth IRA in 2022 provided your income is low enough. From there, that money grows tax-free until you reach age 59½, at which point you can take distributions without paying any income taxes, so long as you’ve had the account open for at least five years.
This makes Roth IRA funds perfect for scenarios where you’re not sure whether you’ll need the cash or not. If you wind up being in a position where you can leave your money alone, your Roth IRA contributions can continue growing and compounding until you need them in retirement.
Best of all, brokerage firms let you invest your Roth IRA funds however you want, whether you prefer to invest in individual stocks, mutual funds, ETFs or index funds. You can even work with a financial advisor to open a Roth IRA.
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