One common thing everyone will tell you about short-term investment is, saving is better than investing. While it is only a recommendation, it is important to keep it in mind. There are countless investment opportunities but before you spend your extra money, it is important to ask yourself why you are investing in the first place.
The first thing to consider before investing in the investments time-frame of maturation. This refers to the time it will take for your investment to earn money. Investments that pay out dividends in the short term will be handled differently from long-term investment dividends. Money that will be used for the next family vacation can be gotten by investing in the short-term while money for retirement is best gotten by long-term investments.
Another thing to note before spending your extra money is, don’t invest all of it in a single venture. Your money needs will help you diversify your portfolio. This is because you will understand what you need to satisfy your needs. This purpose will also help you understand whether you want to spend your extra money on long or short-term investments.
Below we will look at the options you have to invest in both short and long-term investments.
Investing for the Short Term
As mentioned above, when it comes to short-term investments focusing on saving rather than investing is advised. This is because short-term investments need protection from market volatility. Market volatility refers to the statistical measure of the dispersion of returns for a given investment. An important fact to keep in mind is the higher the volatility, the riskier the security.
Put Your Extra Money in High-yield savings accounts.
As short-term investments are not advisable finding a high yield savings account to keep money safe and instantly available is very important. Most high-yield accounts will only pay out about one percent interest for your extra money. These accounts keep your money readily available should you need it while providing a small stable gain.
Placing your extra money in a certificate of deposit rather than a savings account ensures you earn slightly more. A downside to this is that most banks offer better rates when you put up your money for at least a year or more. If you want to keep your money liquid, it is advised that you set up CD ladders with varying maturity dates. By doing this you make sure that part of your extra money is available at all times.
Money market accounts
These offer better interest rates when compared with some CDs. They also offer fewer restrictions. A drawback with these accounts is that withdrawing your extra money from your account is limited to a few times in a month.
Short-term bond funds.
If your investment timeframe is a few months, you can buy short-term bonds. Short-term bond funds multiply your extra money with relatively little risk. If your timeframe is longer, then it might make sense to put your extra money in relatively stable investments. Short-term bond funds have a return of two to four percent over an average of a decade.
Fixed income funds.
Putting your extra money in a fixed income fund will offer you a relatively stable way to get more money. These funds offer better returns than those offered through savings accounts. These funds offer you a number of securities including the all common bonds.
Investing for the Long Term
In order to spend your extra money on long-term investments, it is critical for you to learn to manage the risks that come with these investments. All sorts of investments entail risks. Short-term investments don’t offer much in returns but they do offer minimized risks and limit losses in a crashing market.
When considering long-term investments, on the other hand, you can try and put your extra money in a down market. This is because it is likely to pick up before you need the money. When the time frame for maturation is close, financial experts advise you to use the short-term options listed above to mitigate the risks.
401(k) s and IRAs.
Putting your extra money in one of these tax-favored accounts is a good option. They offer you two options; an immediate tax deduction or future tax-free withdrawals. 401(k) plans offered by employers may come with benefits such as retirement accounts and employers matching your contributions to the account.
Target-date funds may be the best choice for putting your extra money. They take care of your investments so that you wont have to deal with monitoring and reallocating investments as they age. These funds are set up based on when you expect to retire. The closer you get to your retirement year, the fund automatically moves your extra money to bonds and other less volatile investment options.
Peer-to-peer lending platforms enable you to loan money to individuals in small increments as if you were the bank. Investing your extra money in peer to peer lending is advisable as your money earns a pretty decent return of about 6+%. The money you invest in peer to peer lending is split into small increments and combined with other investors’ money. This pool of money is used to give people loans.
Index funds and ETFs.
Opening an investment account with a brokerage is one of the best ways to spend your extra money. You can fulfill your long-term goals such as buying a house or starting a business through these accounts. These accounts include index funds and exchange-traded funds which offer very low fees and the best value for your extra money. ETFs and index funds offer low fees because they are passively managed, which means they can keep their expenses low.
Index funds keep up with the overall market trends while ETFs are more variable. They both offer a collection of securities that can help spread and reduced risks. You are advised to do a lot of research before investing your extra money into a particular fund.
Actively managed funds
This is another viable option for investing your extra money for the long-term. Actively managed funds charge more fees and offer greater risks than index funds and some ETFs. Your financial advisor will inform you which funds are right for your goals and risk tolerance.