There is no universal definition of how short is a short-term investment, but in general investments with a term of less than five years are considered short-term investments.
Depending on your financial situation, you may want to put some of your money in short term investments.
Just like mutual funds, exchange-traded funds (ETFs) represent a basket of securities, including stocks, bonds, and commodities.
ETFs are typically configured to track a major index like the S&P 500. However, unlike a mutual fund, the ETF is listed on a stock exchange, and its shares can be traded. You can buy shares in a high or low risk ETF according to your portfolio mix and your risk tolerance.
High-yield savings accounts
High-yield savings accounts, as the name suggests, will fetch you more interest compared to a traditional savings account. In the prevailing economic climate, traditional savings interest rates are extremely low.
In contrast, the interest in an high-yield savings account will be significantly higher. The larger your investible amount, the more you stand to earn in terms of interest with this type of short-term investment.
Certificates of deposit
CDs do not really fetch high interest rates, but banks will still pay you a higher rate than a traditional savings account.
You will be able to maximize your financial advantage when you invest in bank CD specials. These are rate and term specials, which are get you a better deal than the standard CD rates. The term of these specials is typically one year or less.
Money market accounts
This is something like a hybrid checking and savings account. A money market account includes some features of a savings account, but will also enable you to write a certain number of checks every month from it.
Interest rates on money market accounts are often close to what you can expect to make on a high-yield savings account. Minimum balance requirements are low and there is no specific term on a money market account.
These features make it a good short-term investment option.
This is widely considered as a short-term investment with very low risk. These securities are available in the form of T-bills, bonds, and notes.
T-bills have a term between 4 weeks and 52 weeks, while notes have a term of at least one year.
Treasury bonds have a 10- or 30-year term. Treasury securities have the full backing of the government, which makes them one of the most recommended low-risk short-term investments.
Short-term municipal bonds
Municipal bonds refer to debt securities issued by a county, city, or another government agency. Just like T-bills, municipal bonds have the full backing of the issuing government agency.
This investment pays interest twice a year, and you will get your principal amount back at the end of the bond term.
“Munis” are a low-risk short-term investment that can generate a good passive income. The typical minimum investment amount in municipal bonds is $5,000.