The status quo advice when saving for financial independence is to invest in the stock market by purchasing shares of low-fee index mutual funds and ETFs. This is a long-term investment strategy.
For those of us saving for F.I.A.R., a long-term investment strategy may not be ideal. Let me explain.
F.I.A.R. is a fast-track approach to taking a temporary retirement from your day job, while taking time to fulfill a lifelong dream or go on the adventure of a lifetime. Since the time-frame to achieve FIAR is much quicker than for those seeking a permanent retirement, long-term investment options may not be the best option.
So what other types of investments are there?
Short Term Investment Definition
A short-term investment is an investment that will generate interest or price appreciation within a one-year time period and is considered liquid. Short term investments share the following attributes:
- Low Risk
Liquidity refers to marketability, or the ability to convert an investment into cash. In order for an investment to be considered liquid, you must be able to convert it back into cash within the desired time-frame. Investments that are considered liquid are money market accounts, stocks, derivatives, bonds and notes that mature within the desired time-frame.
Bonds and notes can include corporate bonds, municipal bonds, treasury bonds, notes, and bills, and peer-to-peer loans. But beware – many of these instruments can take 3, 5, or even 10 years to mature. Make sure you understand what you're buying and when you'll be able to liquidate it to cash.
Low risk means you have very little chance of losing money on your investment. Long-term investment vehicles, such as stocks and stock mutual funds, carry too much market risk for short-term investment objectives. Although the market always rises over time, the time-frame is over years, not months.
A short-term investment is one that will generate a return in a short time-frame. Although dividend-generating stocks may produce an income in a short time-frame, price fluctuations could easily wipe out the return. So for the sake of choosing a short-term investment with a likely return, stocks do not qualify.
Because the stock market risk dynamic does not improve unless you are investing for 5 years or more, I recommend using a short-term investment approach if you need to use your cash in less than 5 years.
Short-Term Investment Ideas
There are a number of options available for investing money for shorter time frames, depending on your risk appetite. Here are some ideas to get you started:
- High-Yield Savings Account
- Certificate of Deposit (CD)
- Corporate Bonds & Notes
- Real Estate Crowdfunding
- Peer-to-Peer Lending
This list is provided for research purposes only. Your investment choices are your own, so please do your due diligence before committing to any of these products.
High Yield Savings Accounts
A high-yield savings account is a federally insured savings account that earns interest rates much higher than the national average. Typical high-yield accounts earn around 1% APY.
Most banks that offer a high yield savings account are online banks. They can afford to pay the interest because they don’t have the brick and mortar costs of traditional banks with buildings, rent, and on-site personnel.
Certificates of Deposit (CDs)
A certificate of deposit is a type of savings account that traditionally offered a higher interest rate in exchange for restricting access to the funds for a specific period of time. One-year and five-year accounts are the most common offerings, but other time frames are offered as well.
In addition to the time restrictions placed on funds deposited in to CDs, the other major difference is the amount: CDs are often offered in increments of $1,000, $5,000, and even $20,000 for “jumbo” accounts.
Bonds, Notes & Bills
Corporate bonds and notes are issued by companies that want to raise capital. A bond is a promise to repay an amount loaned—with an additional specified interest rate within a specified period of time.
A corporate note is simply a short term loan agreement between a lending source and a company. The primary difference between notes and bonds is that bonds are always regulated as securities, while notes are not necessarily considered securities. Bonds are typically for longer-term issues, while notes can have a maturity date of less than a year to several years.
Real Estate Crowdfunding
Real estate has long history of profitability, and is considered by some to be the investment of choice for the rich. Real estate crowdfunding works the same way as many other crowdfunding ventures: Investors pool their money to fund a project in the hopes that there will be a future profit.
Real estate crowdfunding offers an easy way to invest smaller amounts of funds and potentially receive an exciting return. But it’s important to keep in mind that investing in real estate is inherently risky, and crowdfunding is still a new concept without a historical record of returns.
Also keep in mind that not all real estate crowdfunding platforms are actually purchasing properties. In fact, many are simply pooling cash to invest in REIT funds, which in turn are invested in actual properties. Make sure you understand what you're buying!
Peer-to-peer (P2P) lending provides a platform for individuals to obtain loans directly from other individuals, cutting out financial institutions as middlemen. Popular platforms include Lending Club, Prosper, Peerform, Upstart, and StreetShares. Lenders who invest in loans on the platform can typically choose between loan terms of three or five years.
When you invest on some P2P platforms such as Lending Club, all of your cash is not tied up for the term of the investment. The money will trickle back into your account as principal and interest payments are made by borrowers, and you can withdraw it at will.
overall Savings Strategy
If you're saving up for a mini retirement or F.I.A.R., you don't need to pour every penny of your savings into the F.I.A.R. bucket. You may want to continue to save for retirement at the same time.
If your company offers a 401k match, you should participate at least enough to receive the full match. That's free money to you! Take advantage of it.
If you already have funds in an IRA or 401k, continue to use long-term investment strategies to manage those funds if you are at least 5 years away from permanent retirement.
If you aren't sure of your strategy, consider consulting with an investment advisor to work with you to figure it out.
Learn More about Short Term Investments
For more information on short-term investments and how to save and plan for F.I.A.R., pre-order a copy of Charting a Course for F.I.A.R. at a discount for a limited time. See below for details: