Inflation has cut purchasing power by 17% since the start of 2020.
Darcy Ungaro looks at the best short-term investments in New Zealand for those lucky enough to have a heap of cash.
So you’ve sold a house, inherited a chunk of money or have accumulated quite significant savings. What’s the best short-term investment to use to park that money?
Remember that inflation is cruel. A dollar at the start of 2020 bought 17% less stuff by the end of 2023. After Covid, many discovered that investing can be a way to create extra dollars, which helps offset the impacts of inflation. The only problem is, the message got a little too loud.
For some, every dollar sitting idle now feels like a lost opportunity. So if you find yourself in possession of more cash than usual, firstly, well done. Secondly, don’t forget the basics – first clear any short-term debt, then build up an emergency fund.
I’d suggest only locking away in an investment fund money you don’t plan to touch for at least five to seven years. Investing tends to beat inflation over the long run, but in the short term, it can be a trap.
Straight up, when your timeframe’s short, just save it.
Where? For everyday people, I can think of three places to “invest” 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.
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’s ready for a quick exit. Consider using a savings account for things like parental leave, renovations, or anything you think will happen soon.
This lane isn’t about beating inflation; it’s about keeping your money safe and on call.
When your exit’s not coming up for a while, it’s 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.
Term deposits can offer higher rates of interest with more certainty. Lock in a period that matches your plans, or ladder a few together – each expiring at different terms, say 12, 18 or 24 months – to smooth out any changes to your interest income.
Just don’t 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.
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.
Now, on to the fast lane. If your savings are smaller than your mortgage balance, this can be the best, short-term “investment” you can make.
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.
For this to work, you need a house and a mortgage, ideally a special type known as an “offset”, or “revolving line of credit”. By repaying a mortgage in one of these facilities, you’re effectively creating a type of savings account, with a very attractive interest rate.
In my case, it worked out that I was achieving an after‑tax return close to 9%, simply by parking my cash in my mortgage. And unlike investing, my money wasn’t at risk of drops in the share market. It’s important to note that there is a little complexity here, so talk to a mortgage adviser if you want to learn more.
So, which is the best short-term investment?
Lane 1: For under 12 months or when your timing is unclear, stay in the left lane with a savings account.
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.
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‑free, after-tax return similar to the share market.
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.
Darcy Ungaro is an authorised financial adviser and the host of the NZ Everyday Investor podcast.
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