Short-term investments have utility in any financial plan, but are even more critical to single-income households. Families with a single breadwinner cannot easily afford heavy financial losses or illiquid assets, making the ability to earn a return in a shorter period more attractive. To be clear, a short-term investment is not a savings account – since instruments like those are savings or cash options.
Investments are either in the income or growth categories, and the short term can be anywhere from a few months to a few years. The best short-term investments have the optimal mix of return and liquidity – two of the basic investment attributes. Since single-income households have greater need for consistent liquidity, income options and selected mutual funds are typically good financial instruments for those.
Money Market Funds and Mutual Funds
Mutual funds are pooled funds that are invested of behalf of contributors (investors who share similar investment goals and risk tolerance). Money Market Funds are a special type of mutual fund – one that is low-risk with moderate returns. Some mutual funds are more aggressive than others, based on the ratio of income options to growth options utilized. However, these financial instruments spread the risk, and money market-type mutual funds are ideal short-term investments because of their higher liquidity and reduced risk.
Bonds
Bonds can be issued by a Central Bank, Treasury or by large corporations. Bonds are essentially loans to institutions that would be repaid at a stipulated rate. They can be transferred and are generally considered safe investments. Their transferability provides the liquidity that a single-income household requires. The only caveat is that, as far as commercial entities, only those that are issued by renowned and financially strong corporations should be entertained.
Temporary or short-term annuities
Short term annuities are the typical solution for those who do not want to commit to life annuities at a point in time. Disability suffered by the income-earner from a single-income household can leave the household strapped for cash. A temporary annuity, which might not exceed five years, would give greater liquidity than a deferred life annuity in such a case, while providing a decent rate of return with minimum guarantees.
Gold and silver
Gold and silver are a part of commodities trading. The prices of these commodities fluctuate, but it is seen as a good short term strategy to buy when the price is low and expected to rise. Basic technical analysis of the relevant market can tell any investor when the price is low enough to suggest that a rise in prices is almost assured in the short term.
Forex trading
Like any investment, currency trading involves a degree of risk. However, the risk is mitigated by the leveraging offered by brokers and the availability of intelligent trading strategies. The Forex market is also highly liquid. This option is likely the riskiest of all the options here, and is similar to options trading.
Loan participation funds are also an option for single-income households. They operate like mutual funds and offer loans primarily to stable companies at high interest rates. This is an even better option than micro-loans, which require more stringency in managing risk.
Single-income households have many more investment options, but lifetime annuities, exchange traded funds (ETFs) with an emphasis on growth, and 401Ks are better medium- and long-term options. Since the investment period is short, short-term annuities, mutual funds, bonds, gold and silver, and currency trading are the most suitable options.