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I have $65,000 that I need to invest but I want to make more than the bank is offering.  Where can get a high return with no risk?

<Sigh.>

This exact question was just asked of me the other day.

You would be surprised how often I get asked this.  More times than I can count!

We’re in an eventful time where the stock market is behaving like a schizophrenic  and interest rates are at record lows – again!

Low mortgage rates are great, but how do you actually make money in the short term?

In such an unstable market, short term investing may be a safer alternative for investors.  Short term investing allows investors to invest their money with little or no risk, while knowing their money is not going to be tied up for long periods of time.

The typical short term investment is for several months, or a few years, and can be turned into cash or other short term investments when they reach maturity. (In the investing world, “long term” investments are really long term — often decades — which leaves room for short term investments that can still last several years.)

Before I share the best short term investments for your money, I first want to share where not to put your money: the stock market.

This can mean individual stocks, mutual funds, ETF’s – whatever.  If you know you need the money back in the short term, the stock market is the last place you need to be.

Short Term Investment Account Options

Here’s what you need to know about the various short term investment accounts available to you:

1a. Online Savings Accounts

Want to be absolutely guaranteed that your investment will not lose any money while at the same time generating a little bit of a return? An online savings account is a great fit for that goal.

In using this account for short term investing you’ll get:

• Guarantee to never lose principal on your investment as long as you keep your total deposit at the bank below FDIC coverage of $250,000.
• A small, risk-free return on your investment. Current interest rates are at around 0.75% to 0.85%. That’s not enough to keep up with inflation, but it is a risk-free return.
• High liquidity. At all the quality online banks you are allowed 6 withdrawals per month from savings accounts. You won’t have to worry about the price of an investment that you have to sell to get liquidity.

In using this account for short term investing you’ll miss out on:

• Potential higher returns from other types of investments.

1b. Online Checking Accounts

Likewise, an online checking account can also serve short term investment needs. You get many of the benefits of an online savings account with even more liquidity because the number of withdrawals isn’t limited.

Since you would be storing your money in a checking account rather than a savings account, you do take a hit on the interest rate. Unfortunately (or fortunately!) interest rates are so low that the difference isn’t as significant as it could be.

In using this account for short term investing you’ll get:

• A guarantee to never lose principal on your investment as long as you keep your total deposit at the bank below FDIC coverage of $250,000.
• A small, risk-free return on your investment. Current online checking interest rates fall between 0.20% to 0.75%. That’s not enough to keep up with inflation, but it is a risk-free return.
• Extremely high liquidity. You get unlimited withdrawals via transfer, debit card, or ATM use with online checking accounts.

In using this account for short term investing you’ll miss out on:

• Potential higher returns from other types of investments, including savings accounts if you don’t need daily access to the money.

2. A Roth IRA

One of my favorite retirement accounts also can work as a short term investing account. With all other types of retirement accounts — from 401ks to Traditional IRAs — if you withdraw funds before retirement you get hit with an early withdrawal penalty and income tax.

The Roth IRA is different. You fund your Roth with after-tax income which means you are free to withdraw any contributions (not earnings on those contributions) at any time you want. It isn’t recommended because you would much rather the money stay invested, but it does give you the option to set money aside for retirement now and withdraw it if times got tough.

In using this account for short term investing you’ll get:

• The ability to withdraw funds. Transfers take a few days and you may have to sell investments at inopportune times in order to cash out.
• Potentially higher rates of return. With a Roth IRA you get access to other types of investments like mutual funds, ETFs, and bonds to earn a higher rate of return.

In using this account for short term investing you’ll miss out on:

• Risk-free returns. When you invest your money into stocks, bonds, mutual funds, and ETFs you are accepting risk for a potentially higher return.
• FDIC coverage. If your brokerage fails you will be able to file a claim with SIPC coverage, but it won’t cover investment losses — just losses from the failure of your broker. (That’s why it is so important to find a great place to open your Roth IRA.)

4. Money Market Account

Money Markets are currently paying a higher APY than CD’s.  Investors familiar with the discipline of owning a CD can earn a higher return with a Money Market and still have immediate access to their funds.  Money Market accounts provide depositors with ATM cards, checks and deposit slips.  Money Market accounts are based on the account balance, not the length of time you invest your money.  When CD rates begin to rise, clients can move their money from the Money Market without paying a penalty for early withdrawal.

Short Term Investment Options

Here are some investments you could use with the above accounts.

5. Short Term Bond Funds and ETFs

Short term bond funds are products managed by a professional advisor.  Bonds are not as stable as money markets, but offer the potential to earn a higher yield.  These bonds are a product of the market and will pay out according to the market’s current condition in fluctuating monthly payments.  Short term bonds usually mature in terms within 2 years or less.

6. Certificate of Deposits (CD’s)

Banks offer a variety of terms for their deposit accounts, ranging from 3 months to 5 years, depending on the investor’s needs.  CD’s allow depositors to invest their cash for a specific length of time.  The longer the term of investment, the higher the yield will be.  A client wishing to receive monthly interest payments can elect to do so at the time of application, or chose to let the interest accrue until the CD matures.

The only downside to a CD is if you need to pull money out before the maturity date you will pay a fee. The fee is usually equivalent to 3 months worth of interest.

Short Term Bonds

There are three main short term investments within the bond category you could consider.

7. 5-Year Treasury Inflation Protected Securities

Treasury Inflation Protected Securities, also known as TIPS, are government bonds that are indexed to inflation. The interest rate on a TIPS is fixed, but the underlying value of the security rises with inflation as measured through the Consumer Price Index. You might only get 0.5% in interest (paid semiannually), but over 5 years the value of the bond might increase 2.5% per year. The end result is at the end of the term your initial investment will be worth as much as it was when you first invested, plus you get a small bit of interest on top of it.

You can buy TIPS directly from the government at TreasuryDirect.gov. However, due to TIPS interest being taxable, most investors prefer to invest in a TIPS ETF or mutual fund. To purchase shares of an ETF or mutual fund you will need a brokerage account.

8. Municipal Bonds

Municipal bonds are slightly more risky than TIPS and other Treasury investments, yet a majority of municipalities do not default on their bonds. The more significant risk is interest rate risk. In a low interest rate environment, if rates rise in the marketplace, the value of the bond decreases to compensate. If you could get 4% on a municipal bond today, that’s a great return. But if rates go up and your bond loses 6% of its value, you’re suddenly on the losing side of the equation. However, the decrease in the value of the bond only impacts you if you sell before maturity. If you hold the bond to maturity you will get 100% of your initial investment back plus the interest yielded to you.

If you’re looking for short term investments, you could buy a bond from someone else that was closer to maturity through a major brokerage firm.

9. Corporate Bonds

Likewise corporate bonds are even more risky than municipals and Treasury bonds because they are not backed by a state, local, or Federal government. With the increase in risk you get an increase in rate of return. The same interest rate risk issue applies to corporate bonds; holding to maturity will eliminate this one piece of risk.

10. Pay Off High Interest Debt

Looking for a great return on your investment? Pay off your high interest debt. If you have a credit card with a 15% interest rate carrying a $10,000 balance you have an opportunity for a great return on your investment. If you pay off that debt it is like getting a 15% return on $10,000.

There are few investments that will earn the high returns of paying off debt. Not only are you getting a great return on investment, you’re saving money from future costs and bettering your overall financial situation. It’s the ultimate win-win.

11. Peer to Peer Lending

Peer to Peer lending websites allow for investors to broaden their investment portfolio by spreading out the investments and reducing their risk.  These websites are a tool that connects investors to qualified consumers in need of a loan and allow investors to become the bank, providing a small percentage of multiple borrowers’ loans.  Investors purchase notes and receive a monthly income in the form of loan repayment and interest.

Peer to Peer Lending Websites:

Lending Club sets the interest rate on notes based on specific credit criteria.  Lending club only accepts desirable borrowers, reducing the risk for default and potential loss for the lenders.  Lenders may start out small and increase the amount of money they are willing to lend as their confidence in the company grows.  Lending Club offers loans from a few hundred dollars to over 10,000 dollars.

Prosper does not set a specific interest rate for borrowers.  The website connects borrowers and lenders through online auction-style bidding.  Lenders are in more control of their monthly income, by accepting an interest rate they are comfortable with. Borrowers list their loan and the highest amount of interest they are willing to pay.  Lenders bid the interest rate down based on the lowest amount of interest they are willing to accept.  This feature provides the stability of a predictable, high yield income on the notes.