Short-term investments are not suitable for everyone – but they can be effective in certain situations. If you have a clear idea of your short-term investment goals, and how much risk you are willing to take, these investments can help you reach those goals faster than other options.
Before deciding on this strategy, ensure it is the best option. Here are five ways to know if short-term investments are suitable for your situation:
The investment period you are considering is short-term
If you are considering making a short-term investment, it is essential to understand that this type is typically not intended for long-term growth. Short-term investments are designed to be held for anywhere from a few weeks to several years and then sold at their peak value. For example:
- You may want to buy shares in Apple Inc., which has been experiencing strong growth over the past year and could potentially continue its upward trajectory in 2019-but only if you plan on holding those shares for less than five years.
- If you’re looking at buying property to make some extra cash by renting it out as an Airbnb rental or vacation home, consider how long it would take before this property starts paying off financially (and make sure there aren’t any zoning laws prohibiting such use).
- Once again, this depends on how long you plan on owning the property, so be sure not only to consider how much money is coming into your pocket but also how much time goes into maintaining the asset itself!
If you want to know about the best low-risk short-term investments, check out this article on the best short-term investments for beginners.
You’re comfortable with taking risks
Whether you’re investing in stocks or bonds, there are risks involved. You should be comfortable with the risk level you are taking. If you don’t understand the risks involved in a particular investment strategy, it may not be a good idea for you to invest.
One way to determine whether an investment strategy is right for your portfolio is by understanding the types of investments available and how much risk they carry.
You understand how to calculate the interest you will earn on investment and the tax implications
If you do not understand this, finding someone to help guide you through the process may be best.
Assuming that an investment earns 5% per year, but has a 20% tax rate, then after taxes, 4% would be left over for us as investors (5% – 20%). This is because others used our money to make more for themselves in the form of dividends or capital gains taxes (which are different from regular income).
So even though investments may seem like giving off good returns on paper, they might not always be what they appear at first glance!
You understand the impact of compounding interest and how it works concerning your investment strategy
Compounding interest is the process of earning interest in your investments. Understanding how compounding works is essential because it can significantly impact your investment strategy.
For example, let’s say you invest $100 in an account that pays 5% annual interest and reinvest all returns into the account each year. If you continue this process for 20 years (a total of 240 months), at the end of those 20 years:
- Your initial $100 would be worth $1306.64 after one year;
- Your initial $1306 would be worth $16084 after two years;
- And so, on until we get up to twenty times our original amount ($1 million).
You have enough money to make a meaningful contribution to the investment.
First, you need to know how much money you can invest. This will help determine what type of investment might be right for your goals and situation.
You can calculate this by dividing your annual income by 12, then multiplying it by 2%. So, if your annual salary is $50K per year: 50/12 = 4; 4 x 2% = 8%. If all your other expenses (mortgage payments, utilities, etc.) are covered, then 8% should be left over as monthly savings ($480).
There you go!
Short-term investments are an excellent way to help you reach your financial goals. They allow you to earn interest on your money and have it grow over time until it reaches its full potential. However, short-term investments are not for everyone.
If you’re looking for something more stable or longer-term, investing in stocks or bonds might be better than short-term investments like CDs or savings accounts with no return guarantee.
