One of my more popular posts is my article titled, “Short, Medium and Long Term Investments”, in which I walked you through the different ways you should think about your money and how you should be investing it. I figured it is a good topic and one that is on a lot of young professionals’ minds and so I would expand my one post into a 3 part post in which I dive into each category of investments. Today’s post will focus on short-term investments.

Why are they short-term investments?

I break up my investments into the 3 buckets (short, medium, long) based on the anticipated timeframe that I think I’ll need/want the money back. For short-term investments, I anticipate that I’ll need to access the money within the next 0-2 years. Short-term investments can also be thought of as “named” savings accounts. In my own life, I’ve got a few of these – grad school and car. As I’ve mentioned, Mrs. Money Finance is currently halfway through an online masters program while still working full-time. Thankfully her employer is paying about 60% of the program, which is incredible, leaving us to pay the remaining 40%. Grad school is not cheap, and she’s known that she’s wanted to do this for quite some time now. In anticipation, starting a few years ago, we would put money aside into a separate savings account nicknamed, “Grad School”. As we had a financial goal that we knew was coming up in the next 0-2 years, we had a short-term investment in the form of a separate savings account.

Due to the nature of when you’ll need the money back (sooner rather than later), you’re probably not going to want to do much ‘investing’ with this money as you can’t really afford to take the risk and lose some of your principal. We knew when she was planning to start grad school and we knew how much it would cost. Because of that timeframe, it wasn’t wise for us to take chances and invest our money in the ups and downs of the stock market. Instead, we kept that money in a safer investment.

How should I invest them?

As you don’t have the time to allow such an investment to really grow, it’s best to park the money some place relatively safely. For most short-term investments, a savings account or money market account will do just fine. Certificates of Deposits (CDs) used to be more popular but not as much anymore but if your bank offers them, that could be a safe way to earn even more interest compared to a savings account. Just be sure to not lock in a timeframe that’s longer than when you need the money. I like those options because they both do not carry any risk or losing my initial amount, while still pay interest. To be smart, consider opening an online bank account (Capital One, American Express, Ally etc). These online bank accounts pay a ton more interest than your traditional bank is likely paying. For example, my American Express savings account pays 1.8% interest while my regular bank (Bank of America) pays like 0.1%. That’s quite a difference in interest rates, in the amount of money the bank will pay me to keep my money there. For short-term investments, consider putting that money in a savings account. It’ll still earn interest, but you’re not at risk of losing any money, which is good because you’ll need all of that money in a very short time to make a big purchase. You may find that it’s helpful to actually open up separate savings accounts in your bank, nowadays that’s easy to do, or if that’s too much work, just stash the money in your general savings account but be sure to keep good documentation of what’s general savings vs. what’s short-term investments. Play it safe with short-term investments!

What are some examples of them?

Short-term investments could be really anything you’re saving up for in the next few years. Perhaps you’re planning to buy a new car and are planning to pay cash for it instead of taking out a car loan. Maybe you’re like Mrs. Money Finance and are planning to go back to grad school in a few years and would rather not dive right back into student debt and so you’ll try to pay cash for it. It could also be smaller things, like saving up for the holidays (which are always expensive) or saving up for that big cruise/vacation you plan to take next summer. Note that this category of investments excludes your emergency fund, although an emergency fund operates in a similar manner (i.e. put aside in a risk-free savings account). You should first fund your emergency fund (start with $1,000, then aim for 3 months, then aim for 6 months of expenses) and then start planning out short-term investments.

Short-term investments are common and are a smart way to set aside money and financially plan for some upcoming plans/goals of yours. Play it safe with your money as you’ll need it soon but be smart and ensure you’re getting a good return on your money, even though you’re paying it safe!