Whether you’re saving for a down payment, renovation or upcoming nuptials, you might be looking for a place to park your cash until you need it. Short-term investments might not offer big returns like long-term investments, but they can help reduce risk, yield growth and remain easily accessible. So, if you have a lump sum of money ready to invest, here are some ideas to put $100,000 into a short-term investment.
A financial advisor can help you create a financial plan for your investment needs and goals.
What Are Short-Term Investments?
A short-term investment is a financial investment that is temporary. You may only plan to invest in it for five years or less. Investors use this type of investment so they can preserve their capital and try to generate a return.
Short-term investments are generally considered less risky. However, the less risk associated with an investment means you don’t have as much growth potential to earn a big return as you would with a long-term investment.
On the other hand, if you intend to keep your money invested for longer than five years, you may consider long-term investments that have a higher potential for growth. As an example, you may consider investing in the stock market, which has historically yielded a 10% return on average. However, the stock market is also pretty volatile. So, having your money invested for a longer time horizon gives you a chance to recuperate your losses during down years.
Best Ways to Invest $100k Short Term
If you want to put $100,000 into a short-term investment, here are six options worth considering:
High-Yield Savings Account
You can open a high-yield savings account at a bank or a credit union. Although high-yield savings accounts may offer minimal interest, usually between 1% and 2.2%, they still offer a place to stash your cash and help your money grow.
To find the best high-yield savings account with the highest interest rate, it’s wise to compare your options since every bank or credit union has different terms and offerings.
Make sure when comparing your options, you identify banks and credit unions that are insured by either the Federal Deposit Insurance Corporation (FDIC) at banks or by the National Credit Union Administration (NCUA). This way, you don’t risk losing your money.
Also, you usually have access to your money with this type of account. Most banks and credit unions let you take six withdraws or transfer per payment cycle. However, make sure to watch out for maintenance fees or ATM fees that could dip into your interest.
Money Market Accounts
A money market account is another type of savings or deposit account. Money market accounts usually yield higher interest rates than basic savings accounts but still enjoy FDIC protection. However, some financial institutions may require that you deposit a minimum amount to open the account. Like checking accounts, you have direct access to your money and can typically write checks or make withdrawals from your account. Keep in mind, the number of transactions usually comes with restrictions to comply with federal law.
The biggest risk you run with a money market account is keeping up with inflation since the interest is minimal. However, since you’re only investing for a short period, this might not be a concern at all.
Money Market Funds
Money market funds, also called money market mutual funds, are low-risk, conservative investments for investors interested in the safety of their principal. These funds invest in high-quality, highly liquid cash equivalents and short-term debt securities with a maturity of one year or less. Minimum balances tend to be high, sometimes as high as $1,000,000. Though not FDIC insured they offer a higher interest rate than money market accounts.
There are four types of money market funds. The securities in which each invests conforms to the type of fund it is:
Treasury Funds: These funds invest in Treasury bills, bonds and notes that are frequently traded.
Prime Funds (also called General Purpose Funds): They invest in non-Treasury securities like floating-rate debt and commercial paper of U.S. government agencies, corporations and government-sponsored entities.
Government Funds: Government funds invest 99.5% of their assets in cash, Treasury securities and repurchase agreements. All investments have to be collateralized by cash and cash equivalents like U.S. government securities.
Tax-exempt Funds: These funds invest in municipal bonds and other securities which are free from federal income taxes and often state taxes. These funds have a lower return than other money market funds due to their tax-exempt status.
Cash Management Accounts
A cash management account is a useful financial instrument that integrates segments of investment, savings, and checking accounts. You can find these accounts along with tax-advantaged investment accounts and brokerage accounts offered through online brokerages for you to manage your money from one location. The option to link your investment account to your cash management account at the same brokerage may be an option if you don’t want to keep them apart.
Like checking accounts, these accounts can be used to keep your money or pay your bills. You can also gain interest on your balance, similar to a savings account. The interest rate you may earn could be higher than a credit union or conventional bank.
You have the option to use a CMA instead of a traditional checking or savings account or in addition to either of them. To reassure you that your money is safe, CMAs are usually FDIC insured.
Short-Term Corporate Bonds
When large companies need funding for an investment, they may issue corporate bonds to pay for an initiative. Usually, corporate bonds are considered a safe investment that pays interests regularly, typically monthly, quarterly, or bi-annually. You can sell corporate bonds on financial markets when they are open, meaning they are a liquid investment. So, when you’re ready to sell, you won’t have to worry about accessing your cash in a hurry.
These types of bonds are a combination of different corporate bonds from companies of all sizes and industries. The diversification built into the bond helps minimize the risk. This means that if one of the corporate bonds doesn’t perform, it won’t drastically impact your overall return on investment.
Keep in mind, though, short-term corporate bonds are not backed by the government. In other words, there is a chance you could lose money. However, bonds are generally a safe bet, especially if you invest in a diversified group of them. Also, fluctuating interest rates don’t impact the price of the bond. So, you won’t have to worry about that when you go to sell your bonds.
No-Penalty Certificates of Deposits (CD)
A no-penalty certificate of deposit, or CD, allows you to ditch the average fee from a bank if you happen to cancel your CD prior to maturity. CDs can be found at your bank; typically, you can gain a higher return from them than other options like a money market or savings account.
CDs are interest-gaining accounts that have a maturity date. So, when you open one, you consent to keep your money in this account for the specified length of time. This can span from lengths of weeks to years; it is dependent on the maturity you want to reach. You will receive a higher interest rate in return for keeping the money secure in your account.
The CD interest is paid systematically. When the agreed term has been reached, your bank will give you back your principal investment in addition to the interest gained.
In a time of climbing interest rates, a no-penalty CD may be ideal. You have the option to withdraw your investment without a penalty fee so that you can invest somewhere else with a higher rate of return.
The FDIC insures CDs, ensuring you don’t lose any money with this investment. While short-term CDs come with minimal risks, one possible gamble is missing out on a higher interest rate available somewhere else while your funds are locked into the CD.
You could also lose purchasing power due to inflation if the interest rate is too low.
Short-term U.S. Government Bonds
Similar to corporate bonds that are issued by companies, U.S. government bonds are issued by the government and other federal agencies. Government bonds are a combination of low-risk bonds funds from investments such as T-bills, T-notes, T-Bond, and mortgage-backed securities. Since these bonds are backed in full faith by the U.S. government, they are considered a safe investment.
Since government bonds are one of the most traded investments on financial markets, they are considered very liquid. Also, interest rate fluctuation doesn’t impact the funds of short-term bonds, so you won’t need to worry about interest rate risk either.
How to Determine the Best Short-Term Investment
There is no one-size-fits-all solution for investing your money. You must consider the pros and cons of each investment to decide the best place to put your money. For example, if you know you need to have full access to your funds at any time, a CD might not be the best choice. This is because you might have to keep it invested for a specific amount of time. Plus, you may also have to pay the penalty to remove your money unless you select a no-penalty CD.
So, a high-yield savings account may make the most sense since you want to be able to withdraw your money at any time without the additional hurdles.
You have many options when determining the best way to invest $100k short term. First, revisit your financial goals and review the ins and outs of each option to pinpoint the right solution for you. While short-term investments usually come with minimal risk when compared with long-term investments like stock, it’s still essential to get familiar with the investment you’re considering.
A financial advisor can help put your investment plan into action. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Asset allocation is an important part of all investing, no matter the time horizon. Use SmartAsset’s free asset allocation calculator to figure out how you should allot your money based on your personal financial situation.
Photo credit: ©iStock.com/shapecharge, ©iStock.com/metamorworks, ©iStock.com/Jirapong Manustrong