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Investing your money can be a difficult concept to grasp; mostly because there are so many different options and no matter what kind of research you do, you never really feel like you are fully informed. In situations like this, I suggest that you turn to a trusted friend or family member to try and explain the basics to you. You can even turn to a professional to explain your options.
Unfortunately, the term “investing” can also mean different things; mainly short-term investments or long-term investments. In order to get the most out of your money and in order for you to have access to your money when you need it, you’re going to need to know the difference. Today, let’s focus on short-term investments and the best short term investments that you can put your money in right now.
Short-term investments are generally stocks, bonds, and other types of investment accounts that can be liquidated fairly quickly (like within the span of a few years).
When you’re looking for the best short term investment, you’re going to have to look at a few different things including how fast your money can grow, interest rates, how your money accrues interest and on what platform, and the fees involved if you do take your money out before the investment matures.
Let’s take a look at a few of your options.
#1) A Roth IRA
Roth IRA’s are retirement accounts. With most retirement accounts, if you withdraw money before you’re supposed to, you get smacked across the pocketbook with a penalty and income tax. Roth IRAs are different. You are able to withdraw contributions (however, not the earnings that you get from contributions), if you want. This aspect makes a Roth IRA perfect for short term investing.
The stock market can be so unsteady at times, that if you want to use the stock market for short term investment, it can be really risky. In order to get the most out of your dollar, you’re really going to be gambling with your money. The stock market works better for long term investments. Roth IRA’s are great because they can do both.
If you’re interested in investing in a Roth IRA, check out your local brokerage firm (like ShareBuilder or Betterment).
#2) Short Term Bond Funds And ETFs
Short term bonds and exchange traded funds (ETF’s) aren’t as stable as money markets but they are able to produce more money for you (faster), which makes it pretty ideal for a short term investment. They are mutual funds that normally mature in about three to five years. These types of bonds are based on how the market is doing. They also mature in about 2 years or less. If you’re interested in a short term bond fund or an ETF, check out Scottrade or E*Trade.
#3) Certificate of Deposits (CD’s)
Certificate of Deposits (or CD’s) let depositors invest their money for a specific length of time. Like a retirement fund, if you have to take money out before it has fully matured, you’ll get stuck with a fee (which normally equates to about 3 months of interest). They are pretty risk-free as long as you are able to leave your money alone.
#4) Municipal Bonds
Municipal bonds can be risky because if rates rise in a market, the bond decreases to compensate for the different. Let’s say that you get 4% on a municipal bond today. That’s pretty good, right? Well if rates go up and your bond loses, like, 7% of its value, all of a sudden you won’t be getting as much money as you would a few days ago.
Of course, that will only happen if you sell before it matures. If you hot on to it, you’ll get 100% of your initial investment plus the interest that they owe you.
#5) 5-Year Treasury Inflation Protected Securities
5-Year Treasury Inflation Protected Securities (or TIPS) are government bonds that are inflated depending on the index. The interest rate may be fixed but the value of the initial investment rises with inflation (depending on the Consumer Price Index). This is way less risky than the previous investment that I mentioned (Municipal Bonds). You can get TIPS from TreasuryDirect.gov.
I like CDs because you can use them in the short term without a long term commitment. When I have had some investment money I was not ready to place long term, I have used a one-year CD to give myself some time to make a decision, while still putting the money to use.
I find that this is also a good way to build a beginning investment nest egg. The money is locked up enough that you can save more to add to it, but not so much that you couldn’t access it in a few months, should a need arise. Once you have done this a couple of times, you will have a larger amount to work with.
This is also what I do with money that I want to have access to. It’s a whole lot better than just sticking it in a checking account; at least you get some return on your money.
I’ve purchased municipal bonds and sometimes the rate was great and sometimes not. So depending when they mature you can make quite a bit of interest or just a little. I know people with CDs, and they are great because of the low risk and probably one of the more popular investments.
The rate of interest is always a gamble in this economy. CDs are secure with easy access when needed. I once locked into a retirement account and had an emergency come up. Of course I couldn’t access it without being stuck with a heavy fee.
I think this is why most people like them and many who are just “starting out” tend to flock to a CD before anything else. Many are worried about jumping in too hard and worried about being nailed with fees. I know some people that avoid investing all together just in case something backfires.
But aren’t CDs pretty low yield? That makes them undesirable as a long term investment strategy, right? I do see how they could be useful in some circumstances.
This is a nice breakdown of different types of investments. I frequently find myself a bit overwhelmed by the choices, so I end up not doing any of them. I’m just scared of making the wrong decision.