The 10 Best Short-Term Investments & Strategies

A house or a corporate stock option can provide significant investment returns if you plan on holding them for a long time. But what if you’re trying to boost your earnings now rather than later?

A short-term investment is a great way to generate more consistent, supplemental income in less time. Let’s discuss what a short-term investment is and identify the best short-term investment strategies of 2022.

What Are Short-Term Investments?

Short-term investing is an important strategy for any investor. A short-term investment (also known as a “marketable investment” or a “temporary investment”) is an investment that generates cash typically within five years.

It’s important to note that “short-term” is a highly relative phrase in the investing world. For instance, if you’re an investor whose assets will generate returns in twenty or thirty years, then you might consider a ten-year investment to be a short-term investment. But in most cases, a short-term investment refers to any asset with a holding period between one and five years.

Short-term investing is usually low risk, but it provides good returns. Some short-term investments require a minimum holding period. A fix-and-flip property, for example, might require a holding period of one to two years—it depends on the stipulations of the loan.

But other short-term investments have no set maturity or expiration date. Individual stocks are one example. If a company experiences a surge in stock price, you could buy a stock and sell it for a significantly higher price after only one or two weeks.

Both individual investors and businesses can participate in short-term investing and for a variety of purposes. It’s a great way to diversify your investment portfolio and safely generate cash.

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What To Consider Before Short-Term Investing

Before you make a short-term investment, ask yourself two questions:

• What are your investment goals?

• What is your risk tolerance?

• What do you know about investment strategies?

Your investment goals will determine which type of investment you make. Some investors may want to create a passive income, while others may want to amplify the cash that’s sitting in their bank accounts.

Dror Zaifman, a finance professional & a seasoned director for iCASH, offers this advice, “Before investing, think about what you will need the money for. If you need it within a year, then you should invest in short-term instruments such as cash and near cash investments. If you need the money in a few years, then you can consider investing it in longer-term instruments such as stock markets or fixed income securities”.

As you consider where you want to go, think about your ideal timeline. Do you want to bolster your monthly income? Or, are you trying to save for a down payment over the next year? These questions will help as you review the variety of short-term investments below.

You should also determine your risk tolerance—in other words, how much of a loss are you willing to take? Remember, no investment is guaranteed and there’s always some amount of risk even in investments that are considered safe.

A final tip before you begin assessing potential options is to ask what you already know about finances. Often, the key to short-term investments is being able to jump right in. In these cases, more complex investments may not be the best route forward. Instead, look for strategies suited to your existing skills or strategies you can learn how to manage while maintaining your preferred timeline.

The 10 Best Short-Term Investment Strategies for 2022

Looking for the best investments for 2022 and beyond? Here are ten of the best short-term investment strategies that provide fast, lucrative returns with low risk:

1. Savings Accounts

2. Corporate Bond Funds

3. Government Bond Funds

4. Treasury Securities

5. Money Market Accounts

6. Certificates of Deposit

7. Cash Management Accounts

8. Peer-to-Peer Lending

9. Roth IRA

10. Rewards Checking Accounts

1. Savings Accounts

You might not have thought about a savings account as one of the best short-term investments, but it is. Think about it like this: when you put your money in a bank account, you’re basically giving a loan to the bank. That’s why you’ll earn interest on your accounts. A savings account can be a good short-term investment option if you’re going to hold a large amount of money in savings for 1 to 5 years.

Unfortunately, the average savings account yields a very small amount of interest. However, you could always open up a high-yield savings account and earn substantially higher interest.

A high-yield savings account is a type of savings account that typically yields 20 to 25 times the interest that a regular savings account does. It’s a great option if you’re:

• Saving for vacation

• Saving for a large purchase (like an automobile)

• Putting money away for emergency funds

If you’re going to have money sitting in the bank account for a prolonged period, why not earn as much interest as you can?

A high-yield savings account might not have all the features that come with a standard savings account. In fact, online banks and credit unions typically offer savings accounts with the highest rates, which forces some people to hold their checking and savings accounts at different banking institutions. Thankfully, it’s easier than ever to make online transfers between different institutions.

It should also be noted that high-yield savings accounts often require that you make a higher minimum deposit and that you maintain a higher minimum balance.

2. Corporate Bond Funds

A corporate bond is a type of debt security that’s sold to investors and the second on our list of the best short-term investments. Large companies issue them to raise money for any number of purposes.

You might be asking yourself, “What’s the difference between a corporate bond and a corporate stock?” A stock is a share of the company that gives the investor a small degree of ownership. The investor receives dividends on the stock, and the stock may experience a rise or fall in value depending upon the company’s success.

A corporate bond is more similar to a loan. The company will pay back the investor for the amount paid, and there’s usually a pre-established interest rate and maturity date.

A corporate bond is considered a safer investment than a stock because the investor will most likely get his or her money back, plus interest. Stocks are riskier because they may never increase significantly in value, and there’s no clear indication of the best time to sell the stock.

A corporate bond is only at risk if the company collapses. But even so, the company’s assets are typically used as collateral so there’s a better chance your losses would be reimbursed. So far as short-term investing goes, you can find corporate bonds that mature in three years or less.

3. Government Bond Funds

A government bond is similar to a corporate bond, but it’s issued by the government rather than a corporation. Like a corporate bond, a government bond is considered a low-risk investment. In fact, government bonds issued by the U.S. Treasury are considered to be some of the safest bonds in the world and among the best short-term investments.

Because of their low risk, government bonds typically pay low interest rates. However, they’re optimal because they’re exempt from state and local taxes (bonds from foreign governments are not), and you can even find government bonds that pay interest periodically rather than at the maturity date.

Here’s the icing on the cake: you can take great pride investing in government bonds. Most government bonds are used to fund helpful domestic programs, infrastructure projects, parks, and an array of other public services. They’re a feel-good investment for the patriotic investor.

4. Treasury Securities

We mentioned treasury bonds in the last section, but two other types of treasury securities are equally safe and desirable. The differences lie mostly in the range of maturities.

The T-Bill has the shortest maturity range of all the treasury securities. Typically, treasury bills have terms of 4 weeks, 8 weeks, 13 weeks, 26 weeks, or 52 weeks.

T-Notes have maturity terms that range from 2 to 10 years. These securities pay interest semiannually.

T-Bills and T-Notes are arguably the best treasury securities for short-term investing. But you can couple those investments with longer-term treasury bonds and earn short-term, medium-term, and long-term profits.

5. Money Market Accounts

A money market account is a type of bank account that is basically a hybrid between a checking account and a savings account. Unlike a regular savings account, a money market account typically allows you to write checks and use a debit card, and it also offers higher interest. Government regulations limit you to six withdrawals per month.

You might consider opening a money market account if you want to enjoy the flexibility of a checking account with the higher interest of a high-yield savings account. It could also be an optimal bank account if you’re a retiree—you could deposit your retirement funds in the account and use it to pay some bills.

Banks and credit unions offer money market accounts. Like a high-yield savings account, a money market account has stricter requirements than the average savings. But you can have your money market account insured, so it’s a very safe investment.

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6. Certificates of Deposit

A certificate of deposit (CD) is an account in which you deposit a large sum of money and leave it untouched for an extended period of time. In return, you’ll earn a premium interest rate. However, you’ll be charged a penalty for early withdrawal.

The best CD interest rates are much higher than any savings or money market account. It might be a good option for you if you’re saving for an extended period of time—maybe you’re saving for a down payment on a home, or a new car, or a trip around the world. If your money is going to sit in the bank for a long time, you might as well get as much interest as possible and boost your earnings.

CD terms vary, and you’ll find ones that range from 6 months to 18 months, or even longer. Most CD terms fall within the short-term investing range. So long as you’re disciplined with your money and don’t make an early withdrawal, a CD can be a great way to put your savings fund to work for you.

7. Cash Management Accounts

A cash management account is an account that’s offered by an institution other than a bank or credit union. They’re mostly issued by brokerage firms.

Most cash management accounts are similar to the standard checking account: they come with a debit card, a checkbook, and online bill payment services. And they usually offer higher interest than the standard checking account.

Cash management accounts are really only helpful if you’re an investor and have already opened an account with a brokerage firm. If you’re making investing a significant part of your income, you’ll enjoy being able to manage your personal finances and your investment accounts at a single institution. And when it’s time to file taxes, you’ll have fewer statements and documents to gather.

Furthermore, most cash management accounts have services that will help you maximize the profitability of your investments and manage your investment cash flow.

8. Peer-to-Peer Lending

Peer-to-peer lending is when an individual takes a loan from another individual—no middleman involved. P2P lending is also known as “social lending” and “crowdlending,” and it’s a relatively new type of investment opportunity that’s only existed (in a formal capacity) since 2005. There are many websites that facilitate P2P lending.

You’ll open an account with a P2P lending site and deposit a sum of money that’ll be used in your loans. Loan applicants create their own profile and will get matched up with you. Most P2P lending sites are fairly good at assigning some kind of “risk rating” to an applicant that can help you determine which loans are best for you to grant.

A P2P account may be a good alternative to a savings account because it usually generates higher interest. There is, of course, a risk of default so you should choose your applicant carefully and reevaluate your risk tolerance before you grant a loan.

For short-term investing, try and grant loans that mature within 5 years.

9. Roth IRA

A Roth IRA is a type of individual retirement account (IRA) that’s used to hold retirement funds. With a traditional IRA, your contributions are tax-deductible, but you’ll pay taxes when you start making withdrawals. A Roth IRA is the opposite: you pay taxes on your contributions, but your withdrawals are tax-free.

A Roth IRA is generally considered a better retirement account than a traditional IRA. Sure, you’ll have to pay more taxes with each contribution. But when you finally reach retirement age, you won’t have to pay anything on your withdrawals. It could lessen your financial burden during retirement.

Roth IRAs don’t pay simple interest. But if you open your Roth IRA at a brokerage firm in which you have investments, your account can earn compound interest based on the interest and dividends of your investments. This is a great way to significantly boost your retirement funds if you’re an investor.

While a retirement account is generally a long-term investment, you can increase your account earnings in the short-term by maintaining a Roth IRA at your brokerage firm.

10. Rewards Checking Accounts

Not all checking accounts are made the same. Some of the lucrative checking accounts you’ll find include:

• Interest-Bearing Checking Accounts: The traditional model for owners of checking and savings account is currently to hold enough funds to cover bills in checking, and then transferring the rest into a savings account to earn bank interest. However, you can access higher interest earnings by transitioning to a high-yield checking account instead. These typically have a high minimum balance requirement, but they generate high interest.

• Premium Accounts: Premium checking accounts also require a high minimum balance, but they’ll typically offer some worthwhile services (financial advice or discounts) or rewards points you can redeem for products and services. Some of these discounts and rewards can save you lots of money. And saving is earning, isn’t it?

Summary

Short-term investing is when you make investments that generate returns in one to five years. However, “short-term” is a highly relative definition. The best short-term investments are beneficial because they can supply you with steady or more immediate cash flow, and it’s a good way to diversify your investment portfolio. Before you make a short-term investment, be sure to identify your investment goals and your risk tolerance.

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