What Is a Short-Term Investment?
In regards to investing, “short-term” refers to an investment made that can easily be converted to cash in under five years. Usually, these investments are high-quality and very liquid assets or investment vehicles like certificates of deposit, money market accounts, high-yield savings accounts, or Treasury bills.
A business may also hold short-term investments as a current asset; these are investments that are expected to be converted into cash within one year.
How Do Short-Term Investments Work?
The goal of short-term investing is to protect capital while generating a return.
For the individual investor, it’s more about protecting your assets while maintaining access. Saving for a down payment, taking a vacation, or starting a small business are all examples of short-term goals that require funding. To grow those funds while maintaining the freedom to access them without penalty, short-term investment vehicles are quite useful.
For businesses in a strong cash position, investing excess cash in short-term investments or cash equivalents will earn more than what would be earned from a standard bank account. A business will categorize a business investment as short-term if it meets two requirements: it must be liquid and it must be sold in a short period of time, usually under one year.
What Are Examples of Short-Term Investments?
High-yield savings accounts
The average interest rate on savings accounts is less than 1%. You can find significantly higher rates at an online bank or credit union. Keep in mind that “significantly higher” still means less than 3%.
Certificates of deposit (CDs)
CDs exist in term lengths from three months up to five years, with higher interest rates associated with longer terms.
Money market accounts
These accounts function much like savings accounts, but earn a bit more.
Bond funds
A bond fund is a mutual fund consisting of bonds with staggered maturity dates, ranging from 1-5 years.
Municipal bonds
Bonds issued by local, state, or non-federal agencies, offer higher yields and are often exempt from income taxes.
Peer-to-peer lending
These financial platforms that match borrowers to lenders. As a lender, you invest money that is assigned to borrowers and recoup the principal plus interest on the loans.
Roth IRAs
IRA contributions can be withdrawn at any time without penalty or taxes due. Earnings may be withdrawn tax- and penalty-free, with conditions.
