A lot of investing advice revolves around your retirement: How much to contribute to a 401(k), how much you should have squirreled away at every age, the differences between traditional IRAs and Roths, etc. But there are plenty of other ways to invest for shorter-term goals (or just because).
A few notes: Before looking into these options, the most prudent moves are making sure your emergency fund is set and you’re contributing as much as you can to (or to the limit of) your retirement account (an exception here might be your 529, depending on your situation).
And short-term investments are inherently riskier than your longer-term investments. But they can also have big payoffs.
Like 401(k)s, 529 plans are named for the section of the tax code that defines them. They are tax-advantaged savings plans sponsored by states or state agencies. There are two types: prepaid tuition plans and college savings plans. For our purposes, we’ll focus on the latter.
College savings plans are investment accounts that are earmarked for a beneficiary’s future tuition, fees, books and room and board. You can choose to invest in a variety of products, including ETFs, mutual funds and target date funds (which automatically get more conservative as the beneficiary nears college age).
The benefit of 529s are that the earnings are not subject to federal income tax or usually state income tax if they’re withdrawn for qualified higher education expenses. Like retirement accounts, if you withdraw money for non-qualified expenses, you’re hit with a penalty. Per the IRS, there may be “gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year.” However there is no income limit on opening them and no limit on the number of accounts you can set up.
The potential downside is that you’re not guaranteed to come out ahead—this is still investing. You could have less money in your account than you started with when your kid reaches college age, depending on the market. There are also fees to consider: College savings plans may charge an enrollment fee, annual maintenance fees, etc.
You can compare different states’ 529 plans here.
A brokerage account is a taxable account (the money you earn from your investments can be subject to capital gains taxes) that lets you invest in different products, including stocks, bonds, REITs, money markets, CDs, ETFs, and mutual funds, among others. (You also open retirement accounts through a broker.) There are no contribution or income limits, you can open as many as you like and you can typically withdraw the money whenever you want, without a fee, depending on the broker. (Though transferring money between brokers will likely cost you.)
There are full-service brokers, which charge per transaction, and discount brokers, like Ally, Robinhood, and TD Ameritrade. You, the investor, pick which products you want to invest in (unless your full service broker is managing your account), and your broker executes trades for you. I think of these as active accounts—you’re picking your investments and in some cases making trades—whereas I think of robos (below) are passive investments.
Things you’ll want to keep in mind:
- Account minimum
- Fee per transaction
- Annual service fees (percentage or flat fee)
- Inactivity fee
- Transfer fee
- Minimum balance fee
Robo advisors are essentially cheaper brokers that manage your portfolio with an algorithm. They’re usually advertised to beginner investors.
Robos will suggest a portfolio based on an investor profile you create, differentiating them from online brokers. Your portfolio will likely be composed of low-cost ETFs and index funds, according to NerdWallet, and you pay the company that manages your account (say, Wealthfront or Betterment) a fee, as well as whatever expenses the funds you own charge. The robo rebalances for you.
Some users like these in lieu of a savings account with an anemic interest rate. The catch here is that your money isn’t immediately available to you like it is in a savings account, and of course there’s the potential for loss (your savings account is FDIC-insured).
Direct Stock Plans
Some companies let you buy stocks directly from them as opposed to through a brokerage so you don’t pay a commission. “Some companies require that you already own stock in the company or are employed by the company before you may participate in their direct stock plans,” notes the SEC. They may also offer dividend reinvestment plans, which allow investors to automatically reinvest their cash dividends into the company.
You can buy fractional shares and set up a monthly buy (so instead of buying X numbers of shares, you’re buying $50 worth of shares per month, for example) or make a one-time purchase. You can set these up through a transfer agent.
Investing in a single stock is riskier than in a mutual fund or ETF (and you should never put all of your money into a single stock), but for some blue chip companies it could pay off.
High-Yield Savings Accounts and CDs
These two options aren’t investments, but for very short-term goals, they’re safer options with the potential for small returns. You can compare interest rates on high-yield savings accounts here.
CDs aren’t sexy but they can help in the short term, and they’re insured. You put money in for a set amount of time, and you can earn slightly more interest than a normal savings account (it may be helpful to think of CDs as savings account you don’t have access to for a set amount of time). If you take money out before your term is up, you’re hit with a penalty.
Here’s what Bankrate suggests:
One way to maximize returns on a CD is to ladder it: This means you invest proportionally in a variety of term lengths. Then, as each shorter certificate matures, you reinvest the proceeds in the CD with the longest term. So, if you want to invest $10,000, you might put $2,000 apiece in one-, two-, three-, four- and five-year CDs. At the end of the first year — when the one-year certificate matures — you’d put that money into a new, five-year CD. The next year, you reinvest the funds from the matured two-year certificate in another five-year CD.
Bitcoin and Other Cryptocurrencies
I have nothing much to say about cryptocurrencies—some experts compare buying crypto as speculating rather than investing. If you still don’t know what they are or why you should care, we have a few good explainers:
If you sold Bitcoin or used it to buy something in 2017, remember that that’s taxable income (it’s subject to capital gains tax).
I’ll say this: Crypto is definitely a thing you could make or lose real money on. And I guess that’s what investing is all about.
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