Finances FYI | Presented by JPMorgan Chase
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There are two main types of investments—short-term and long-term. A short-term investment is money or assets held for a short period ranging from one to three years, to earn additional money. These typically are invested in easily accessible accounts.
Short-term investments can be an excellent way to grow your money or reach a specific financial goal. Learn what to consider before making your short-term investment and the available options.
What to Know Before Short-Term Investing
When considering short-term investments, it is wise to have a clear investment goal in mind. For example, goals may include:
- Saving for a large purchase.
- Paying off debt.
- Building an emergency fund quickly.
Understanding your investment goals helps you determine the best investment strategies and products for your situation.
Often, the interest earned on short-term investments is less than the interest rates you pay on debts, such as a student loan or credit card bill. It may make more financial sense to start by paying these off before putting a lot of money into an investment.
Before investing, it is also essential to understand your risk tolerance. Short-term investments can be more volatile than long-term investments and may result in more significant losses. The best way to minimize risk is by investing in low-risk options that suit your investment objectives. Low-risk options such as savings accounts are a good way to begin investing if you have a limited budget and want to protect your money in case of market volatility. There is a higher return potential with investments such as stocks and mutual funds, but they come with a greater risk of loss.
In conjunction with your risk tolerance, assess your investor experience. Beginner investors should seek out options that don’t require a great deal of expertise. Do initial research on the best investment that meets your goals, risk, tolerance, and current market conditions. While more experienced investors may be able to watch the market to buy low and sell high for quick gains, stocks are generally better long-term investments.
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Short-Term Investment Options for Beginners
High-Yield Savings Accounts
A high-yield savings account is an excellent way to save for short-term goals. With a high-yield savings account, you can safely and securely store money for use in the future. The interest rate of a high-yield savings account is usually higher than that of a regular savings account, allowing you to earn more on your investment. This low-risk account will enable you to reach your short-term financial goals quickly and safely. Check with banks for their minimum balance and other requirements.
Money Market Accounts
Money market accounts are another low-risk investment option for short-term investors. They offer higher interest rates than savings accounts insured by the Federal Deposit Insurance Corporation (FDIC). In addition, money market accounts allow for easy access to your funds, so you can take out your money when you need it.
Certificates of Deposit
Certificates of deposit (CDs) are interest-bearing savings accounts that offer a higher interest rate than savings accounts but with a lower rate of interest than money market accounts.
Typically, a bank will issue a CD with a term of one to five years or longer and a fixed interest rate. With a minimum deposit, interest is paid at the end of the term when the CD matures. Be aware that penalty fees may occur if you withdraw money early.
Short-Term Savings Bonds
Bonds are loans to the government, municipalities like cities or states, or companies at specified interest rates for a fixed period. There is a risk that the borrower may not be able to pay the loan back, but government bonds are considered less risky than stocks. They also tend to have higher rates of return than money market accounts, especially ones with short-term maturity rates.
Money Market Mutual Funds
Money market mutual funds invest in more conservative investments such as corporate debt, the treasury, and securities. They are considered less volatile than other mutual funds. Plus, they are designed as a short-term investment, usually of a few months, then easily liquidated. Some may be exempt from federal and state income taxes as well.
Another short-term investment option is investing in stocks. But beginner investors should be careful with their investments as stock markets fluctuate drastically. Generally, investing in equity mutual funds or individual stocks is a long-term investment plan.
Short-term investments are great for people with short-term savings goals, like paying for a wedding or family vacation. They’re also ideal if you expect to use the money in less than two years. However, they typically offer lower interest rates and fewer investment options than long-term investment vehicles.
Short-term investments can be an excellent way to go if you’re starting and aren’t sure how long you plan to invest. They can help you build savings without worrying about market fluctuations and fluctuating interest rates.