Straight up, when your timeframe\u2019s short, just save it. <\/p>\n
Where? For everyday people, I can think of three places to \u201cinvest\u201d money needed in the next one to three years. Think of it like a motorway: the left lane is for the next exit, the middle lane is for medium-term destinations and the right lane is for when performance really matters.<\/p>\n
Lane 1 is your humble savings account. Any money to be spent within the next 12 months should creep along here, in the slow lane, where it\u2019s ready for a quick exit. Consider using a savings account for things like parental leave, renovations, or anything you think will happen soon. <\/p>\n
This lane isn\u2019t about beating inflation; it\u2019s about keeping your money safe and on call.<\/p>\n
When your exit\u2019s not coming up for a while, it\u2019s time for the middle lane: term deposits. Maybe your funds are for a house settlement, a wedding next year, or retirement spending money for the not-too-distant future.<\/p>\n
Term deposits can offer higher rates of interest with more certainty. Lock in a period that matches your plans, or ladder a few together \u2013 each expiring at different terms, say 12, 18 or 24 months \u2013 to smooth out any changes to your interest income. <\/p>\n
Just don\u2019t forget that if you unexpectedly need to get the money back early, breaking the agreed term will usually cut into your interest returns, so pick your terms carefully. <\/p>\n
I should also mention the Depositor Compensation Scheme. Bank failures are rare, but they do happen. This new government scheme covers you for up to $100,000 if your deposit-taker fails, when your money is held in DCS-protected accounts. The $100,000 is per depositor, for each licensed deposit-taker. To maximise your cover under the scheme, keep your combined cash amounts at under $100,000 at each bank. <\/p>\n
Now, on to the fast lane. If your savings are smaller than your mortgage balance, this can be the best, short-term \u201cinvestment\u201d you can make. <\/p>\n
I had a little extra cash at the start of this year, and I put it into a special type of mortgage account that allowed me to withdraw it again whenever I wanted. <\/p>\n
For this to work, you need a house and a mortgage, ideally a special type known as an \u201coffset\u201d, or \u201crevolving line of credit\u201d. By repaying a mortgage in one of these facilities, you\u2019re effectively creating a type of savings account, with a very attractive interest rate. <\/p>\n
In my case, it worked out that I was achieving an after\u2011tax return close to 9%, simply by parking my cash in my mortgage. And unlike investing, my money wasn\u2019t at risk of drops in the share market. It\u2019s important to note that there is a little complexity here, so talk to a mortgage adviser if you want to learn more. <\/p>\n
So, which is the best short-term investment? <\/p>\n
Lane 1: For under 12 months or when your timing is unclear, stay in the left lane with a savings account. <\/p>\n
Lane 2: For one to three years or with a set timeframe, use the middle lane with term deposits. Spread them over different terms, and different banks if the money is over $100,000, to get the best use of the Depositor Compensation Scheme. <\/p>\n
Lane 3: If you have a mortgage, use the fast lane. Park your cash here in an offset or revolving line of credit mortgage account, for a risk\u2011free, after-tax return similar to the share market. <\/p>\n
You should invest for the future, yes, but within three years, you should avoid locking up short-term money in long-term strategies. Pick the lane, set a review date, and let the plan do the work. <\/p>\n
Darcy Ungaro is an authorised financial adviser and the host of the NZ Everyday Investor podcast.<\/p>\n