What are Short-Term investments?
Short-Term investments are one of the most important and commonly used types of investment in saving accounts and investment programs, generally, the income provided by Short-Term investments may be relatively modest however the primary purpose of these types of investments is to serve as reserve funds or to save money for a particular objective, this makes them an essential tool in any well-rounded saving or investment plan.
Short-Term investments are known for being safe (low-risk investments), and that’s why some individuals who don’t want to take risks choose them.
5 best Short-Term investments:
- High-yield savings accounts: this type of investment is known for being safe and accessible for everyone, investors are interested in these savings accounts because they offer higher interest rates than traditional savings accounts.
- Certificates of deposit (CDs): Certificates of deposit are another low-risk investment that offers a fixed interest rate for a specific period, however, they may have penalties for early withdrawal.
- Money market accounts: Money market accounts also known as (MMAs) are a combination of checking and saving accounts, they offer high-interest rates like a saving account but over and above that they provide check writing privileges and easy-to-access funds like a checking account.
- Corporate bonds: Corporate bonds are debt securities issued by corporations to raise funds by borrowing money from investors, they are acknowledged as being less risky than stocks and pay either a fixed or variable interest rate over a predefined period however corporate bonds can be affected by changes in interest rates.
- Treasury bills: Treasury bills or T-bills are short-term debt securities, with terms of two years or less. T-bills do not pay interest until maturity and are sold at a discount from their face value.
Short-Term investments
Advantages:
liquidity: short-term investments can be easily converted to money.
Low-risk: short-term investments are usually safe and less likely to lose value.
Flexible: short-term investments can be used as a protection against inflation or to diversify a portfolio.
Disadvantages:
Relatively low returns: short-term investments offer lower returns compared to stocks and long-term investments.
Inflation: sometimes the returns of short-term investments may not keep up with inflation.
Sensitivity to interest rates: the value of some short-term investments such as bonds or certificates of deposit may decrease if interest rates rise.
Short-Term investments fees:
Short-Term investments come with various fees that can affect their return such as:
Maintenance or transaction fees for high-yield savings accounts and money market accounts.
Brokerage services or commissions for Corporate bonds.
early withdrawal penalties for Certificates of deposits (CDs).
Market volatility:
Short-term investments are known for being low-risk, but this does not mean that they are not impacted by market volatility. Most Short-term investments are impacted by interest rate variations, inflation, GDP growth, unemployment rates, and economic conditions. The only way for investors to keep their investments safe is to diversify their portfolio, monitor closely their investments, and do research before any financial decision.
Investment minimums:
Some of these investments might have minimum investment amounts in order to invest in them, these amounts vary depending on the type of investment, some short-term investments, such as high-yield savings accounts and money market accounts, have low or no minimum investment requirements, making them accessible to investors with low capitals, however, Certificates of deposit, treasury bills and corporate bonds generally have a higher minimum investment requirement, typically $1000 or above.
Returns and Expectations of Short-Term investments:
Returns from short-term investments generally differ based on the type of investment selected. High-yield savings accounts typically yield higher interest rates compared to standard savings accounts, providing a moderate yet relatively stable return. Certificates of deposit (CDs) offer fixed interest rates for a specified term, granting higher returns than traditional savings but often necessitating locking funds for a predetermined period. Money market accounts tend to offer higher interest rates similar to savings accounts while providing the convenience of check writing privileges. Corporate bonds, while considered relatively less risky, provide fixed or variable interest rates over a defined period, with a rate slightly higher than money market accounts or CDs. Treasury bills, on the other hand, are known for their safety but might offer lower returns compared to other short-term investments as they do not pay interest until their maturity.
Here’s a general overview of the returns from different types of short-term investments:
- High-yield savings accounts: These can offer interest rates ranging from 1% to 4.5% annually.
- Certificates of deposit (CDs): Returns can be from 1.3% to 4.8% depending on the CD term.
- Money market accounts: Interest rates are typically in the range of 0.5% to 5.1% annually.
- Corporate bonds: The returns can vary based on the issuer but are often in the range of 3.0% to 6.0%.
- Treasury bills: T-bills are known for lower returns due to their low risk, with interest rates varying from 4% to 5% annually.
Please note that these interest rates are reflective of October 2023 and may vary over time. These figures can fluctuate based on economic conditions, the issuer’s credit rating, the length of the investment, and market interest rates at the time of purchase. It’s crucial to research current rates.
What is the best method for beginners to invest money?
A savings account is recommended as the ideal starting point for those new to investing and unfamiliar with its workings. It provides a straightforward and risk-free approach accessible to everyone. While many savings accounts offer modest returns, some banks present yields reaching up to 4.5%, comprising a combination of interest and a bonus upon achieving your savings target. Here’s how it operates: after establishing a savings goal, you begin depositing money into your savings account, and the bank starts tallying your rewards (comprising interest and the bonus). Upon reaching your savings goal, you have two options: maintain the funds in the savings account to continue receiving an ongoing interest rate (around 2%) or transfer it to your checking account to receive both the premium and the accrued interest. however, if you don’t reach the goal you have set and decide to take your money back you will only receive the interest (around 2%) and you will lose the savings target achievement premium.
