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I Will Teach You To Be Rich Articles

The Best Short-Term Investments

Key Takeaways:

  • Short-term investments are available in a variety of forms, from high-yield savings accounts to bond funds.
  • Investments with a shorter timeline can be safe, but some may be more vulnerable to market fluctuations.
  •  The best short-term investment for you should reflect your risk tolerance, liquidity needs, and overall financial health.

Why Would I Consider a Short-Term Investment?

When it comes to investment strategies, the buy and hold approach is popular and espoused by financial wizards like Warren Buffet. This strategy means that an investor buys stocks or other securities and keeps them for the long haul, regardless of ever-changing market conditions. The main benefit of the buy-and-hold strategy is that long-term investments can weather short-term fluctuations in the market and eventually rebound. In turn, investors can typically expect steady returns over time.

While long-term investments like a 401(k) should be part of your overall financial narrative, short-term investing offers real value for money you want to grow and use in under five years.

If you have money sitting in your checking account, for instance, you can move it into a short-term investment. Even if you choose a very safe but low-return option, your money is still growing – which it would never do just by sitting in a checking account.

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What Steps Should I Take Before Investing?

First, take a hard look at your income and debts. Do you have any high-interest debt sitting on your credit cards? It’ll be much better for your overall financial health to settle those debts instead of banking on the modest returns from a short-term investment.

Consider your unique financial situation before jumping into a short-term investment – these aren’t get-rich-quick schemes. It’s also a good idea to understand your goals for your short-term investment. Ask yourself the questions below to guide you to the right choice as you read over some of your options.

  • How easy is it to liquidate the investment into cash?
  •  Will I need access to my funds, or do I plan to park my money untouched until maturity?
  • Do I want the term length under a year, a few years, or five years?
  • What is the expected return for this type of short-term investment?

What are the Best Short-Term Investments?

Choosing the best, safest short-term investments means passing on investments that might offer higher returns, but at a much higher risk of losing your money. Below are a few examples of short-term investments that can help you grow your wealth, without putting your money at undue risk.

High-Yield Savings Accounts

Although many banks don’t offer any payment for keeping your cash in a particular account, some provide annual percentage yields (APYs) as high as 2.5%. High-yield savings accounts won’t deliver the same kind of returns you might see with stocks, but it’s still growth for no risk up to the FDIC-insured limit of $250,000.

Certificates of Deposit (CDs)

Certificates of deposit or CDs are FDIC-insured accounts where your money must remain untouched for a set period, from a few months to a few years. The longer it takes for the CD to mature, the higher the interest.

At the end of the CD term, the bank opens a window to access your funds plus interest. In some cases, you’ll only have a short window of time to access your money before it’s rolled into another CD. So, read the terms and conditions to understand the timing. CDs come in different maturity lengths, so you can pick one based on how long you want to park and grow your money. Once a CD matures, you can renew it or cash it in.

Unfortunately, stiff financial penalties apply if you withdraw your money early, so it’s critical to avoid putting your emergency fund into one. Keep your rainy-day fund in your savings account, where you can use it at a moment’s notice.

Money Market Accounts (MMAs)

A money market account is like a high-yield savings account, but it requires a minimum deposit and limits withdrawals. Withdrawal restrictions vary but may limit how much you can withdraw each month, how often, or both. While MMAs don’t allow you to cash out all at once, you still have more flexibility than a CD.

The FDIC insures many money market accounts, and they’re a safe way for beginners to try their hand at investing.

Short-Term Bonds

Short-term bonds come in a wide variety, but the most promising for short-term investments are low-cost index mutual funds and ETFs. When it comes to short-term bonds, you can purchase a fund that invests in government bonds or corporate bonds. Government bonds aren’t FDIC-insured, but they’re still considered very safe.

Corporate bonds are also not backed by the FDIC. While they also tend to be safe, they do present more credit risk than government bonds.

In general, short-term bonds usually have a lower interest rate risk because of their shorter maturity. So, if the interest rate drops or increases, it won’t impact the price of the fund dramatically.

 Treasury Bills

Treasury bills are a type of short-term bond sold by the U.S. Treasury with maturity periods that can be just a few days up to a year. Similar to a CD, the longer the maturity period of a T-Bill, the higher the interest.

When you buy a T-Bill, you’re purchasing it for lower than its face value. So, if you buy a T-Bill that pays you $2,000 when it reaches maturity, you might buy it initially for $1,900. The Treasury pays you $2,000 when it matures. Unfortunately, these are among the lowest-paying short-term investments, but they still can beat certain CDs, money market accounts, and savings accounts.

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Short-Term Investing, One Dollar at a Time

Investing your money is a great way to grow your wealth. With options like money market accounts or even high-yield savings accounts, there are a wide range of choices for every kind of investor. With that said, it’s important to take the time to develop your financial literacy and understand the terms and conditions of the investment you choose. And don’t just ignore your investment once you’ve parked your money there. Read your statements, look for notifications, and keep track of maturity dates. By monitoring performance, you’ll get a bird’s eye view of your progress toward your financial targets

The Best Short-Term Investments is a post from: I Will Teach You To Be Rich.

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I Will Teach You To Be Rich Articles

Betterment versus Wealthfront: Which Is The Better Robo Advisor?

Key Takeaways:

  • Robo-advisors deliver a hassle-free way to grow your money, hit financial goals, or prepare for life milestones like retirement
  • Betterment boasts a human touch with its financial-advice packages designed to meet major money goals
  • Wealthfront offers a digital-only spread of investments, college savings plans, tax optimization features, and user-friendly financial planning software

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What is a Robo-Advisor?

Betterment and Wealthfront are both examples of robo-advisors, aka automated digital services users can leverage for financial planning. As you might infer from the word itself, these virtual platforms are automated and use algorithms to determine investment portfolios, dole out financial advice, and can help push you closer to accomplishing your money goals without the need for much human intervention.

After users input financial information like risk tolerance and savings targets, a robo-advisor spits out customized advice and can automatically invest your money on your behalf. Both robo-advisor platforms in question, Betterment and Wealthfront, offer user-friendly features, portfolio management, and educational resources. The right choice for you depends on your lifestyle and financial goals. We’ll dive into the differences between them below.

What Makes Betterment a Good Robo Advisor Option?

Hands-Off Investing and Savings Growth

Betterment offers beginner investors a digital plan with easy steps to set and accomplish a goal. Users can get a birds-eye view of their asset allocation for a simple way to understand your portfolio. Betterment builds portfolios based on a mix of exchange-traded funds (ETFs), which are based on broad market sectors rather than individual securities. If you’ve fallen behind on a financial goal, you’ll get a nudge from the app to set more aside – an ideal feature for younger investors who have a hard time imagining accomplishing far-off goals like buying a house or retiring.

Betterment also offers Betterment Cash Reserve, a savings account with an impressive 0.40% annual percentage yield (APY) for no minimum account balance or management fees.

Optional Human-Based Support

If you opt for Betterment’s Premium plan, you can tap into the knowledge of their financial advisors. Unfortunately, that means you’ll pay 0.40% of your assets and you need a $100,000 minimum investment for the privilege. 

You can also talk to an advisor after choosing one of Betterment’s advice packages for milestones like retirement or planning for a baby. These packages include a phone call with an actual financial advisor plus an actual action-based plan. For users who want to talk to a real person to get insight into their finances, being able to get advice applicable to a specific situation from an expert may prove to be worthwhile.

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Automatic Portfolio Rebalancing and Free Tax-Loss Harvesting

When you open a taxable account with Betterment, you can set a goal for the account like building wealth or creating an emergency safety net. After inputting your information, you’ll get a stock and bond allocation according to your goals. You can manually adjust your portfolio—but the catch is that you need to have at least $100,000 in assets.

A free, optional service called Tax-Loss Harvesting helps you mitigate the impact of any losses in your portfolio to keep your portfolio balanced.

Educational Resources

For users who want a finely-tuned understanding of what’s going on with their money in Betterment, there are countless resources available on their website. Videos, articles, and comprehensive FAQs can help you develop your financial knowledge.

Drawbacks of Using Betterment

Management Fees

You’ll be charged an annual fee of 0.25% for the Digital plan but no minimum balance is required to open the account initially. For a Premium plan, you can expect to pay a 0.40% annual fee and you’ll need $100,000 for your minimum balance. To get any sort of discount for management fees, you’re required to have at least $2 million in your account.

Limited Investment Options

Your portfolio is limited to stocks and bonds with no alternatives available. For most investors, especially beginners, this isn’t a huge issue. But if you’re a more advanced investor, you might feel limited.

What Makes Wealthfront a Good Robo Advisor Option?

Customized Investments

When you invest using Wealthfront, the platform will divide up your portfolio in six to eight asset classes, which can include corporate bonds, real estate, dividend stocks, foreign stocks, U.S. stocks, and inflation-protected securities. Like Betterment, Wealthfront utilizes low-cost exchange-traded funds (ETFs).

Your investment portfolio is based on how much risk you can tolerate and readjusts when the market changes. Ultimately, the goal is to minimize the amount of taxes you’ll need to pay, so the overall investment approach is “buy-and-hold.”

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Portfolio Rebalancing and Tax Mitigation

Just like Betterment, Wealthfront offers free, automatic portfolio balancing and tax-loss harvesting to keep your finances on track.

Whether you are an experienced investor or just getting started, it’s helpful to know what you’re getting yourself into when your money is on the line. Wealthfront delivers a user-friendly experience with plenty of helpful financial planning tools.

College Savings Plans

Need to save money for a college-bound child? Wealthfront features a 529 college savings plan. It keeps your child’s college fund on track and adjusts automatically for inflation. When it’s time to choose a college, Wealthfront can even help you estimate how much financial aid you’ll receive from a certain school.

Portfolio Line of Credit

Once your investment account makes it to $25,000, you can qualify for a portfolio line of credit and borrow up to 30% of your account’s value. You don’t even need a credit check nor will your credit score be influenced at all.

Digital Financial Planning Software

Path is a tool Wealthfront users can leverage to manage their wealth and plan for their future needs. It’s offered for free so anyone can prepare their budgets for longer-term financial goals like a home purchase. The best part? You don’t even need to have an open Wealthfront account to use it.

Cash Account

If you prefer to put your money in savings, you can use the Wealthfront Cash Account for free. It offers 0.35% interest and carries up to $1 million in FDIC insurance. Money in your cash account isn’t charged any management fees, similar to Betterment’s savings plan offerings.

Drawbacks of Wealthfront

Management Fees

Fees at Wealthfront are comparable to Betterment. You can expect the same annual advisory fee of 0.25%, which is a competitive rate for online financial platforms. For 529 plans, you can expect to pay 0.42% to 0.46% annually.

Minimum Account Balance

Unlike Betterment, you’ll need at least $500 to open a Wealthfront account. Although that might not be a large number, it’s still a barrier to entry for beginner investors who have less capital.

Minimal Human Interaction

If you prefer to talk to an actual person, Wealthfront doesn’t have many options to do so. There isn’t an advisor available to give you personalized financial advice and there isn’t an online chat feature. With that said, there is a phone line available between Mondays and Fridays you can use if you need an issue resolved.

Which Robo-Advisor Wins Out: Betterment vs. Wealthfront?

Ultimately, the robo-advisor choice for you depends on your preferences and financial goals. Both Wealthfront and Betterment are strong options in the robo-advisor market. If you prefer to get a financial plan for a specific goal, Betterment’s advice-based packages might offer the most bang for your buck. And if you prefer hassle-free, human-free investing or saving, Wealthfront lets you take a back seat while growing your money.

Betterment versus Wealthfront: Which Is The Better Robo Advisor? is a post from: I Will Teach You To Be Rich.