When it comes to building wealth and securing your financial future, property investment has long…
You have cash that you don’t need to spend immediately but would probably need in a year or two for something special, like a new car or renovations.
What do you do if you want to make the most of the money that you’ll need in the short term?
You could put it in your bank account or invest it in an instrument that can give you more cash when you need it.
If you want your money to grow in a short period, there are several short-term investments available for you.
Understanding the Benefits and Downsides
What are my short-term investment options?
What is a short-term investment?
Short-term investments are highly liquid investments that can be converted to cash within a relatively short period. However, short-term investments are limited to certain types of investments and have lower returns than long-term investments like shares in the stock market. On the other hand, they can be a good choice for those who need access to cash at short notice.
When you invest $40,000 and need it in three years, you’re looking at receiving $40,000 plus interest after three years. Receiving less than $40,000 after three years defeats your purpose. You’d end up not buying that car or cutting back on your renovation plans.
Is short-term investing higher risk than long-term investing?
Determining the risk involved with short-term investments requires an understanding of the relationship between interest rates and investment returns.
Most of the time, interest-bearing accounts are a very safe way to grow money quickly. You know how much interest you’ll earn over a certain amount of time before you sign the contract.
On the other hand, investing in shares is not a sure thing. After a big drop in the market, it might take months or even years to get your money back.
This shows one of the most important rules of investing: if you want high returns, you have to be ready to take on more risk. On the other hand, low returns often come with the comfort of a low level of risk of losing money.
A short-term investment should essentially be lower risk compared to a long-term investment. In theory, long-term investments typically experience fluctuations and returns are undetermined, however, the strategy has time to recuperate from this volatility and the potential to experience capital growth.
Understanding the Benefits and Downsides
There are different short-term investment vehicles available in the market, such as high-interest savings accounts, term deposits, short-term bonds, and managed funds. Each of these instruments has its advantages and disadvantages, but they do have commonalities.
Pro: Safe and Guaranteed
Most short-term investments are safe if are covered under the Australian government guarantee on deposits—a safety net for deposits of up to $250,000 per account user per authorised deposit-taking institution (ADI).
The Financial Claims Scheme (FCS) protects depositors in the unlikely event that their Australian incorporated bank, building society, or credit union fails.
Con: Not an Emergency Fund
The main idea behind a short-term investment is to make the most of your money as planned. Unless your money is in a high-interest savings account, your money is typically tied up for the entirety of the investment period.
Although short-term investments are highly liquid investments, most of them are liquid only when the investment matures. Thus it’s best to have a separate bank account for emergencies.
Pro: Earn Interest
Short-term investments may be low risk but you still earn a higher interest than your everyday transaction account. You can even receive a high bonus interest rate from a high-interest savings account. Other short-term products offer fixed rates, so you can calculate your exact return.
Con: Fixed Interest Rates
With a fixed interest rate, you receive a fixed income. You know exactly what your return will be, but you will not benefit if interest rates rise. You can only benefit from rising interest rates at the end of your term.
Additionally, some short-term investments offer simple interest not compounding interest. This means interest is calculated solely on your principal; whereas compounding interest is calculated on your original principal and the accumulated interest over time.
Pro: Capital Growth
High-yield savings accounts are designed to encourage you to save and help you preserve capital and benefit from competitive interest rates. Other short-term investments will pay back your entire principal plus interest, thus ensuring capital preservation and growth.
To ensure that you stick to your investment as planned, short-term investments can charge you penalties or forfeit interest if you withdraw your money early.
What are my short-term investment options?
If you’re intent on safer and less speculative investments that guarantee returns here are some of the short-term investment options available.
Savings accounts are different from bank accounts. Your bank account (aka transaction account) is made for your everyday transactions, such as paying bills and receiving your wages.
A savings account is meant to help you save money and give you interest on your balances every month as a motivation to save.
- Traditional Savings Account
The interest rate on a traditional savings account is higher than on transaction accounts. Most savings accounts are online and don’t have debit cards, so you’re less likely to be tempted to use your money.
Traditional savings accounts give you interest every month or year, no matter how much you save or spend. This means that as long as your money is in the account, it earns interest.
However, the interest rate on most traditional savings accounts can go up or down based on how the economy is doing. Most of the time, rates change when the cash rate changes. The Reserve Bank of Australia has been raising the cash rate for many months in a row, which means that interest rates are going up.
This is good news if you have money in savings accounts because you will make more interest.
- Bonus Interest Savings Account
A bonus interest savings account features a “bonus” interest rate. It may have a flexible base rate of 0.5% and a 4.0% bonus rate. The extra rate means that you will accrue interest at a rate of 4.5% p.a.
This total rate requires particular conditions, which can include requiring a monthly deposit, limiting withdrawals, requiring a joint account transfer, and so on. Be aware of your bank’s conditions because special interest savings accounts usually have a lower base rate than conventional savings accounts.
Fixed Term Deposits
Fixed-term deposits, aka term deposits (TDs) or certificates of deposit (CDs), are offered by banks and typically pay a higher interest rate than savings accounts. This is because you agree to keep your money invested with the bank for a specified period.
TDs have different maturity dates, most lasting between one to five years, and there is usually a minimum amount needed to open a fixed-term deposit.
The best TD interest rates are typically offered for large investments with banks holding cash for a long period. However, you might have to pay a penalty if you withdraw the money before the term is up.
Another thing to think about is that if you choose a fixed rate and the RBA raises rates higher, you will still be stuck at the lower rate.
There are six types of TDs according to Canstar.
- Short Term Deposit
A short TD usually lasts anywhere from 1 to 12 months. It’s recommended for people who want to save money quickly or who don’t want to keep it locked up for years.
These accounts tend to have much lower interest rates than long TDs because the terms are shorter.
- Long Term Deposit
A long TD can be between 1 and 10 years long. It is recommended for customers with medium to long-term financial goals or who have a lump sum they don’t need in their regular spending budget.
This can be a good option for retirees who want a low-risk investment option. Just keep in mind that you won’t be able to touch your money for the duration of the term.
- Advance Notice Term Deposit
An advance notice TD allows you to make a withdrawal without penalty if you give at least 31 days’ notice before you withdraw. Due to their high-interest rate, these accounts are growing more popular, but if you need money in an emergency, it will take 31 days.
- No Notice Term Deposit
You can withdraw money from these TDs without providing any notification in advance. They are a wonderful choice if you want the freedom to access your money whenever you need it without having to wait the required 31 days or in an emergency. However, you’ll typically receive a lower interest rate with these types of accounts.
- Interest Paid Monthly Term Deposit
Some companies have recently started to offer deals where you receive interest monthly. One benefit of it is that your money will start earning interest early. It’s important to remember that if you receive interest regularly, you may have a lower interest rate.
- Low Balance Term Deposit
Most TDs require a minimum investment amount to open, and these can vary greatly. Low-balance TDs have a minimum balance requirement of $1,000 or less, and sometimes there is no minimum. It is good for people who don’t have a lot of money to save, but, the less money in the account, the less interest it earns.
Short Term Bonds
Bonds are another low-risk, short-term option that Australians may consider. Over the past 10 years, the average return on bonds has been 3-4% per year. Bonds are a type of loan or debt that companies and governments give out. They pay interest in the form of a “coupon,” which is a set rate of interest paid once a year on the face value (initial value) of the loan.
There are three types of bonds according to interest paid: fixed-rate bonds, floating-rate notes, and indexed-rate bonds.
There are two types of bond issuers: government and corporate.
- Government Bonds
Australian Government Bonds (AGBs) and Semi-Government Bonds (Semis) are the two types of government bonds.
Semis are a type of semi-sovereign debt that Australian states and territories can use to borrow money. They can only be bought or sold by state and territory treasury companies.
AGBs, which are also called Australian Government Securities (AGS) are loans issued by the Commonwealth of Australia through the Australian Office of Finance Management (AOFM).
The AOFM issues three types of securities: Treasury Bond, Treasury Indexed Bonds, and Treasury Notes.
Treasury Bonds are debt securities with a medium to long-term maturity. They have a fixed annual interest rate that is paid out every six months.
Treasury Indexed Bonds are medium to long-term securities whose capital value is modified to account for changes in the Consumer Price Index (CPI). Interest is paid every three months at a set rate on the adjusted capital value. At maturity, investors receive the bond’s adjusted capital value, which accounts for CPI adjustments.
Treasury Notes (aka treasury bills) are short-term securities that can be bought back at face value when they mature. Terms of treasury bills last less than a year. The Australian government issues Treasury Notes to help meet its short-term cash requirements.
- Corporate Bonds
Bonds issued by corporations are sold to investors as a means of financing their operations.
Unlike government securities, corporate bonds are unsecured. Thus there is a chance that if interest rates rise, the market value of the bond will decrease or the bond issuer will stop making bond payments if their venture fails.
If you invest in a managed fund your money is pooled with the money of other investors. Your investments are bought and sold on your behalf by a professional investment manager. However, management, administrative, and entry/exit fees apply.
- Short-Term Bond Funds
One of the easiest ways to invest in short-term bonds is through index funds or exchange-traded funds (ETFs), which provide a ready-made diversified investment portfolio of government and corporate bonds.
- Money Market Funds
A money market fund is an unlisted managed investment scheme that invests in a range of money market securities, such as overnight cash, short-term money market deposits, short-term government bonds and bank bills.
Money market funds are lower risk compared to shares, however, they are not covered by the Financial Claims Scheme.
What to watch out for with short-term investments
Good short-term investments are typically characterised by three traits: stability, liquidity, and low transaction costs.
These features help ensure that your money will not be at risk and will be accessible when you need to use it, which is one of the major reasons to have a short-term investment.
How do I know if short-term investments are suitable for me?
Short-term financial investments are best for saving up for upcoming big-ticket expenses. Here are three things to think about when investing for the short term.
When you’re looking at a short time frame to make a large purchase in the next year or two, liquidity may be more important than growth.
Short-term investments require discipline to save money monthly.
The biggest risk in many of the best short-term investments is missing out on higher interest rates while your money is stuck in a fixed-term investment.
If you value liquidity, can save money monthly, and understand that you may miss out on higher interest rates, then short-term investments might be right for you.
How to start short-term investing
Before you start investing, you need to do your homework and organise your finances. Identify your goals, time frames, and know your risk tolerance.
Once you’ve done your homework and determined which short-term investment vehicle is best for you then start investing. It’s best to seek the advice of a professional financial adviser who can devise a tailored strategy suitable for your needs and can help you to establish your chosen investments.
Make sure to check the product disclosure statement (PDS) before giving your money. When a financial service company recommends or offers you a financial product, it must give you its PDS, which bears information about the product’s main features, fees, commissions, benefits, risks, and how to file a complaint.
Invest for Your Short-Term Goals with Coastal Advice Group
Short-term investing is a different process than investing with a time horizon of years or decades. It is important to set expectations, focus on security, and pick the investment based on your needs.
Understand the risks of your investments. Short-term investments are usually pretty safe, but be sure to understand what you’re investing in.
While investing can seem complicated and time-consuming, it doesn’t have to be that way with knowledge and expert guidance. Whether you’re young or old, it’s never too late to start investing for your future.
Need investment advice? Coastal Advice Group helps you tailor your investment plan and build your portfolio. Our financial advice team can help you establish direction for your investments to achieve your financial and lifestyle goals.
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.