Every few weeks, someone emails me asking for the best short-term investment.
They're usually saving up for their first home and they want that money to work for them, not just sit around. They don't want to throw it in some bitcoin or anything crazy like that, they just want some kind of return on it. The 0.01% they get just isn't doing it for them.
When I think about my money, I like to think of it as being in time capsules. Anything I need within the next five years needs to be safe.
100% no questions asked, non-volatile and safe.
I still want to get a few cents in interest though. With inflation, anything in cash is losing purchasing power each and every day. If I can slow down that process, I'm all the happier.
What is a “Safe” Investment?
For the purposes of this list, I look at two types of safe investments. 100% safe and “mostly” safe (low-risk).
When you talk about investments, they come in two main varieties – debt and equity.
With debts, you lend your money to an entity and they pay you interest. With equity, you give your money to an entity and you can sell that ownership stake at a later time, hopefully for a nice gain. Neither are inherently safe or risky.
With debts, the safety of that loan depends on the entity. Most safe investments are structured as loans. Riskier investments are often structured as ownership.
With a loan, I'll give you a little extra interest if you promise you won't ask for your money back sooner than I expect. If you lend me money for 12 months, I'll give you one interest rate. If you lend me money for 30 years, it's higher. If you want your money back earlier, maybe I'll take some of that interest back. (this is, essentially, a certificate of deposit too)
With ownership, you buy a piece of me, my business, or some other asset. You may get a periodic payment (dividends) but the return is based on equity appreciation and when you sell the asset. It's riskier because the ownership piece can go up or down in value. Sometimes it can go up and down in value independent of the asset, as often happens with publicly traded stocks.
Safe investments are loans to entities deemed safe. Lending money to the United States Government is safe because it's likely to be repaid. Lending money to your cousin and his new business venture is less safe. Lending money to your 6-yo nephew is even less safe.
Safety does not mean you will not lose money or purchasing power. Inflation is an ever-present spectre and it's why you could get a pack of baseball cards for 5 cents many many years ago (though you could probably still find bazooka gum for a nickel!).
Interest rates are also a concern. As interest rates rise, any fixed interest rate investment loses relative value. If you try to sell it on the market, it'll be worth less than what you paid to get into it (in the case of a bond fund). If you hold it until maturity, you'll still get all your safe money back in many cases. Safe mostly means your principal is protected.
What are some safe short-term investments?
Earn Bank Deposit Promotions
Earn bonuses at banks running huge sign-up promotions. Banks are competing heavily for business, including giving you a few hundred bucks to deposit some money, set up a direct deposit, and wait.
I keep an updated list of the best bank promotions with a minimum $100 bonus.
You have to keep an eye on the minimum deposit amount (often to avoid a maintenance fee) and other requirements but the money is out there just for the taking.
Online Savings Account
Your brick and mortar bank pays you nothing in interest (don't let the 0.01% APY fool you, that's almost a joke if it weren't an insult!) but online banks will pay you at least 1-2% each year. You won't get rich, you won't even beat inflation, but you're beating brick and mortar banks.