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7 of the Best Short-Term Investments You Can Make

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Many investors set aside money for long-term goals like retirement, which could be 30 years or more in the future. That means looking for investments, such as stocks and stock mutual funds, that have the potential to earn high long-term returns from dividends and capital gains.

But what about short-term investing? Short-term goals (generally considered to be five years or less) include things like setting aside money for a down payment on a house. How you invest this type of money differs considerably from long-term investing.

Short-term investments have some easily recognized characteristics. They are liquid, meaning you can access your money quickly and easily at little or no cost. Most investors also prefer their investments to be relatively safe since there isn’t much time to make up for losses. That’s why many short-term investors prefer options like checking and savings accounts and certificates of deposit (CDs).

The risks of short-term investing are typically lower than those you might encounter with long-term investments. Since most short-term investments earn interest, you do face the risk that rates will change and impact the earning power of your investment. But because investments like six-month CDs have such a short lifespan, the interest rate risk is minimal.

7 of the best short-term investments to consider

1. Money market funds

These fixed-income mutual funds invest in short-term debt securities that are relatively liquid, meaning they can be easily converted to cash. Money market funds aim for a steady net asset value of $1.00 per share. They distribute income from the securities they own, such as CDs, corporate commercial paper, U.S. Treasury securities and similar short-term holdings, based on the number of shares you own. Because money market shares are actively traded, you can sell them and access your money at any time without penalty.

Money market funds invest in a variety of assets. For example, prime funds invest in a diversified portfolio of short-term vehicles, such as those listed above. Government money market funds invest their assets in cash and U. S. government securities. Municipal money market funds invest predominantly or exclusively in securities issued by state and local governments that are free from federal taxes (and sometimes from state taxes).

Money market returns vary based on short-term interest rates. In recent years, with short-term rates historically low, money market rates have been low as well. Now that the Federal Reserve has started to raise rates, all interest rates, including those on short-term investments, likely will begin to increase.

2. Certificates of deposit

Certificates of deposit are bank deposits where you invest a fixed dollar amount for a specific period of time. Most banks offer CDs with terms ranging from three months to five years. In return, the bank pays you interest based on the length of the investment, with longer CDs typically paying a higher interest rate than shorter CDs. Banks usually pay interest on CDs annually or semiannually. A CD you buy through a federally insured bank is insured for up to $250,000 by the FDIC, which adds an element of safety to CD investing.

CDs are less liquid than other short-term investments. Most include a premature withdrawal penalty if you withdraw your money before the stated term ends. As a result, make sure you have another source of ready cash for emergencies so you don’t have to cash in a CD before maturity.

The interest you earn on a CD varies by institution. Research and compare your CD options and see where you can get the highest rate.

3. Checking and savings accounts

Some banks offer interest-bearing checking accounts, and most offer savings accounts that pay interest as well. Because you can access your money at any time without penalty, rates typically are low. But because the money is easy to access, many investors favor them for short-term investments, including for their cash reserves or emergency funds.

The bank where you open a CD, checking or savings account doesn’t even need to be in your neighborhood. For instance, online savings accounts often offer higher rates than traditional banks. You can search and compare banks across the country and choose the one that offers the highest interest rate and the best terms.

4. Short-term U.S. government securities

With government securities, you are essentially loaning the U.S. government money to carry out a variety of activities. In return, the government pays you interest for using your money. The U.S. Treasury offers a number of securities with maturities of five years or less. For example:

  • Treasury bills, which are sold at a discount and mature at full face value, have maturities ranging from a few days to one year.
  • Treasury notes are issued in two-, three-, five-, seven- and 10-year maturities and pay interest every six months.
  • Treasury inflation-protected securities (TIPS) are available in five-year maturities. Principal is adjusted based on changes in the consumer price index.
  • Floating rate notes have a two-year term, and interest payments rise and fall based on discount rates for 13-week Treasury bills.

All government securities can easily be sold through a broker and turned into cash within a few days.

5. Short-term corporate and municipal bonds

Like Treasury securities, where you are lending money to the federal government, with municipal securities, you are lending money to states and municipalities to fund their activities. Most municipal bonds have terms of 25 or 30 years when issued, but as they get closer to maturity, a broker can help you buy bonds on the secondary market that have five years or less until they mature.

These bonds are priced so the yield reflects current interest rates. While buying bonds adds an element of market risk, they can be a good place to park short-term cash and earn a fair rate of interest.

6. Peer-to-peer lending

Peer-to-peer lenders offer personal loans to consumers — without a bank. These platforms pair those seeking a loan with investors who are willing to loan them the cash.

In addition to borrowing at low rates, you can invest in making loans to others and earn short-term returns. While the risk of investing may be higher, the potential returns usually are higher than other short-term rates. The sponsoring companies take care of checking the credit of potential borrowers and other administrative tasks.

7. Repay high-interest debt

While this isn’t an “investment” in the traditional sense, it can be a good use of available cash. After you meet other short-term needs (like saving up an emergency fund), paying off high-interest credit card debt can yield a higher return than other short-term investments, such as CDs or money market funds.

Let’s say you have credit card balances totaling $10,000 and an interest rate of 22%. If you are trying to decide how to invest cash over the short term, why not pay off your credit card balance? Instead of paying 22% interest, you can pay off a significant debt and devote the monthly payments you would have sent to the credit card company to rebuilding your investment capital. In this way, you could “earn” 22% in the process.

Most short-term investors are concerned about earning the highest possible return with the greatest safety. A number of investments are available with varying returns and degrees of protection. Check each one carefully to determine which is best for you based on when you need the money you are investing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Peter Fleming
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Peter Fleming is a writer at MagnifyMoney. You can email Peter here

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Should You Pay Off Debt or Save Your Money?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You have a regular source of income, you’re paying your bills on time and you have some extra dollars left over each month. What should you do with that extra cash?

If you don’t have debt (lucky you!), then the choice is simple — save or invest as much as possible. If you have debt, however, the choice can be a bit murkier: Should you pay off your debt first or save? Here are some things to consider when asking yourself that question.

Three times that saving your money might be smarter

1. If you don’t have an emergency savings fund

Just when you’re cruising along, life can throw some unexpected and expensive curves your way. A sudden job loss, medical bills or car repairs can pop up out of the blue, and if you don’t have the funds to pay for them, you can end up seriously in the red. To cover unexpected costs, some may resort to high-interest credit cards and loans. Those kinds of moves can dig you into a financial hole that can take years to pay your way out of.

Saving up a healthy emergency fund can protect you in instances like these. How much should you save? Experts generally suggest that you should save an amount equal to between three and six months of living expenses. Depending on your individual circumstances, however, you may need more than that. (Check out this article to figure out how much to save and where to keep it.)

2. Your employer offers matching retirement contributions

If you’re fortunate enough to work for a company that offers a retirement plan with matching contributions, then consider making that method of saving a priority.

For example, if your employer offers to match your contributions dollar-for-dollar up to 6% of your salary in a 401(k) plan, then contribute at least that much, if possible. The money can then grow in a tax-free or tax-deferred 401(k) until you withdraw it in retirement — all that compound interest can really add up over the years. If you don’t contribute up to that amount, you’re leaving free money on the table.

Note, however, that If you need to withdraw these funds early (before the age of 59 and a half and before the account is five years old) there will be penalties to pay. That makes this a better tool for long-term savings rather than for the short-term or as an emergency savings fund.

3. Your debt has a very low interest rate

Debt gets a bad rap — often for good reason — but in some cases, carrying your low-interest debt and investing or saving your funds instead may be more beneficial. For example, the current fixed interest rate for direct subsidized and unsubsidized student loans is 5.05%, and the average 30-year fixed mortgage rate is about 4.3%. The stock market, on the other hand, has gone up an average of 10% a year since 1926.

Beyond comparing interest rates, however, you also need to assess how much risk you’re willing to take and how much access to your savings that you’ll need. Of course, there are no guarantees that your investments will perform well, and paying down debt comes with zero risk. Savings accounts are a less risky saving option, but the average interest rate is often less than 1 or 2%. Other options, such as individual retirement accounts (IRAs), have restrictions on how the funds can be used outside of retirement.

Four times debt repayment may be more beneficial

1. You have high-interest debt

It’s hard to get ahead of high-interest debt, because compound interest is working against you. Credit card interest rates, for example, average between 15 and 20% — an amount which adds up quickly. If you make the minimum payment, you may not even be making a dent in the principal amount owed, and you can spend years just paying interest. Calculators like this one can help you figure out just how much interest you’ll pay and how long it will take to pay off.

If you have high-interest debt, make sure you explore all the options for paying it down, including consolidating your debt and researching balance transfer cards.

2. Your debt doesn’t offer any benefits

Though your debt is costing you in interest, you might find that some loans may offer useful perks. For example, federal student loans may offer tax benefits and even loan forgiveness programs for eligible borrowers. Similarly, there are tax write-offs for mortgages and in many cases, the money you invest in a home will pay off down the line when you sell your property.

On the other hand, the debt on the credit card you maxed out to pay for that trip to Cabo comes with no benefits — just a bunch of interest. High-interest debt with no benefits should be at the top of your pay-off priority list.

3. You want to raise your credit score

While there are many factors that go into determining your credit score, the amount of debt you carry is an important component. If you plan to buy a home or secure a loan in the near future, take a look at your debt-to-income ratio (DTI), which many lenders consider before approving you for a loan. If your DTI is high, you may want to consider paying off some debt before applying for that new loan, which may result in lower interest rates for you later.

4. Your debt stresses you out

Debt can take an emotional and physical toll on people, ranging from depression to insomnia and more. When it feels like a black cloud hanging over your head and it’s affecting your life in negative ways, it may be in your best interest to prioritize paying debt off first.

Should you pay off debt or save?

Of course, saving vs. paying off debt early doesn’t have to be an either/or situation — ideally, you can do both at the same time. If, however, a choice must be made between the two, there are many factors to consider. As with most financial moves, there are no cut-and-dry rules, and the best one for you will depend on your individual circumstances.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Julie Ryan Evans
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Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here

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Investing

How to Make Money in Stocks

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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