Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master’s degree and is earning his PhD in Community College Leadership.

Short-term investments are used to preserve capital. They offer a low return, but access to the capital is relatively easy. Short-term investments usually have a life of no more than three years.

Definition

Short-term investments are any assets that are anticipated to expire or to be liquidated within the course of 1-3 years. The goal of this type of asset is to protect capital with low-risk investments. However, with low risk, the return on short-term investments is very low.

Types of Short-Term Investments

There are thousands of different types of short-term investment opportunities. Listed below are some of the most common types of short-term investments that many people use:

Savings Accounts. These accounts are the least profitable type of short-term investments. Savings accounts are the most simple, liquid types of short-term investments, but in return for being easily accessible, they offer low yields. Most savings accounts do not even keep up with inflation, so they should not be used to store money over long periods of time.

Certificates of Deposit (CD). CDs are one of the most common types of short-term investments. When you put your money into a CD, you agree not to withdraw it for a specific period of time, in return for a higher yield. CD lengths range from as little as three months to as long as five years. CDs are federally insured, so they are one of the safest types of short-term investments; yet, they still offer a reasonable yield.

Money Market Funds. These are typically liquid like savings accounts, but they offer a better yield. The downside of most money market funds is that they are not federally insured, unlike other types of short-term investments. This makes money market funds a higher-risk vehicle for short-term savings.

Treasury Bills and Bonds. These provide flexible short-term investment terms of four weeks to one year. Treasury bills are designed for short-term savings and offer an extremely low yield. Bonds offer slightly more flexibility, but they may be less secure for short-term savings than treasury bills.

Why People Invest in Short-Term Assets

There are a lot of reasons why people decide to use short-term investments. Below is a list of the top reasons people invest in them:

Retirement. Older people who are living off their retirement do not want a lot of investment risk. Therefore, they invest in short-term, low-risk investments.

Making a New Purchase Soon. People who are planning to make a purchase soon — such as a car or house — also want a low risk investment.

Nerves. Some people cannot take the vicissitudes of investments, so they only invest in low-risk, short-term investments.