Intermediate Term: Avoid High-Risk Investments
Even just a couple of extra years gives you enough time to shift your focus from saving to true investing. Still, 10 years isn’t always that long in investment terms. If you’re working in this time frame you may want to avoid the most volatile investments, such as stocks.
CDs with 5-year terms or longer: If you’re willing to keep your money in a CD for as long as five years, then you have the potential to earn around 0.50+% on top of your initial investment principal.
Short-terms bonds: Buying a bond is essentially lending money to a specific entity, such as the federal government, a municipality, or a corporation. At the end of a specific term, you get back your principal plus interest. Yields are typically comparable to CDs, and longer-term bonds pay more. Bonds are not risk free – they are not FDIC insured, and issuers could default – but they are considered safe investments.
Mutual funds: These allow you to buy several investments, such as stocks or bonds, at once. With a mutual fund, your investment is pooled with money from many other investors and a professional chooses the specific investments. There are generally three types:
- Managed funds typically pursue a stated strategy, such as only investing in a specific category of stock, only in municipal bonds, etc. What’s included in the fund determines how risky it is – and the higher the risk, the higher the return. Because the fund manager needs to be paid, managed funds usually have the highest cost of the three types, as measured by the percent of your investment that goes to pay the fund’s expenses.
- Index funds invest based on a specific stock index, such as the S&P 500. They buy shares in the companies included in the index so that the fund performance matches the index. You’ll sometimes hear this called “passive investing.”
- Exchange-traded funds (ETFs) similarly follow a benchmark index with the goal of matching that index’s performance but are traded on an exchange (like stocks). Index funds and ETFs are typically less expensive than standard mutual funds because there’s no fund manager to pay.
Peer-to-peer lending: Instead of buying shares or bonds, you lend money to individuals or businesses. Several online firms offer this option, which matches those seeking funds with those looking to invest in the debt. The investor makes money because the borrower pays interest on the loan. You may be able to get started with an investment as small as $25, but other peer-to-peer lending opportunities require an initial investment of $25,000 or more.1 Note that this option does have some risk.