Rankings as of May 19, 2023.
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Finding somewhere to park money for the short term can put investors in a tough situation. While it usually doesn’t make sense to invest money in the stock market if you’ll need it within the next year or so, it can also cost you to keep your money in cash in a traditional bank account.
Enter short-term investing.
Short-term investments give you easy access to your hard-earned money, but also ensure that money is not sitting idly in cash.
Table of Contents
- What are short-term investments?
- Best short-term investments
- What to know before short-term investing
- What to look for in short-term investments
*Rates and APYs are subject to change. All information provided here is accurate as of May 19, 2023.
What are short-term investments?
Short-term investment options are types of investments, like high-yield savings accounts and government bonds, that give you a place to put money you may need within a short period of time, like within five years.
If you keep your money in a standard savings account, inflation chips away at the value. And if you invest your money in stocks, mutual funds or exchange-traded funds (ETFs), you probably don’t want to touch that money over the next few years. But short-term investment can provide a higher interest rate and access to your money when you need it most.
Best short-term investments
High-yield savings account
- Safe and insured by the FDIC and NCUA
- Liquid; typically up to six free withdrawals per month
- Lower return than other investment vehicles
Savings accounts offer a safe parking space for your money, but their interest rates are typically low, with national rates averaging 0.24%, according to the Federal Deposit Insurance Corporation (FDIC). High-yield savings accounts offer much higher rates. Discover Bank, for example, currently offers a high-yield savings account.
High-yield savings accounts work the same way as a standard savings account: You deposit money and interest is compounded daily and paid into your account monthly. It’s typically easy to transfer between accounts or withdraw funds, although there may be a fee for withdrawing money more than six times per statement cycle. (The federal government recently changed its rules to allow for unlimited withdrawals, but many institutions still have the limit in place.) The FDIC and National Credit Union Administration (NCUA) insure high-yield savings accounts, which means there’s low risk with parking your money in these accounts.
High-yield savings accounts are ideal for short-term financial goals, like saving for a vacation, and keeping an emergency fund. But if you know you won’t need the money for at least three to five years, other investment vehicles that can offer higher returns may make more sense.
Money market accounts
- Very liquid
- Check writing privileges and debit card access in most accounts
- Higher minimum balances on many accounts
If you love the ease of a savings account and want the ability to use the money quickly, a money market account is a great middle ground. Money market accounts operate like a hybrid of a checking and savings account: users earn interest on their balances, typically at a higher rate than a savings account. However, money market accounts make it much easier to access funds, with many offering check-writing privileges or linked debit cards.
Money markets offer the same safety as a savings or checking account. They are insured up to $250,000 by the FDIC or NCUA. Like savings accounts, some institutions limit withdrawals to six per month. After that, each withdrawal may have a fee assessed.
Many money market accounts offer higher interest rates for higher balance tiers, so the amount you earn may vary. If you don't have enough money to earn the highest rates, there are likely better short-term investments available.
Money market mutual funds
- Higher expected interest rates than savings or money market accounts
- Highly liquid, with check writing ability in many cases
- Not FDIC insured
- Expense ratio for asset management
While money market accounts are bank products that function as savings accounts with more accessibility, money market funds are administered by brokerages or investment firms and are not insured by the FDIC or NCUA. Instead, they are regulated by the Securities and Exchange Commission (SEC).
Money market mutual funds pool the capital from many investors to purchase various high-quality, low-volatility securities like Treasurys, bonds and cash equivalents. On the sliding scale of investment options, money market mutual funds are very safe investments, although they incur expenses for managing each fund, which can eat into profits.
Money market mutual funds are ideal for those who want to benefit from the potential of the market with a low-risk investment. Many accounts still allow money to be withdrawn with little hassle, making them a great spot to hold cash for down payments for large purchases.
Certificates of deposit (CDs)
- Guaranteed returns
- Low liquidity
- Potential for penalties if you withdraw early
A certificate of deposit (CD) skews more toward safety and less toward profitability. CDs are issued by financial institutions and insured by the FDIC or NCUA for lump sums. But while they earn a fixed interest rate like a savings or money market account, they are also tied to a duration, usually from seven days to ten years. The longer the term and the higher the lump sum, the higher the interest rate earned.
Once a CD is purchased, the owner cannot access the money for the stated period. They may withdraw the funds but will incur a hefty early withdrawal penalty that likely erases any interest gained. If interest rates increase during the life of the CD, owners may miss out on income because they are locked into a lower-rate CD. On the flip side, if interest rates fall, owners will earn a higher rate for the duration of the CD. Market conditions play a big part in whether a CD is a wise choice for your long-term plans.
Government-backed assets: Treasurys, bonds and bond funds
- Secured by the U.S. government
- Varying terms depending on what variety is chosen
- Treasury are exempt from state and local taxes
- Low investment threshold
- Easy to purchase online directly
- Inflation can outpace interest rates on longer-term bonds
- Yields can be lower than other short-term investments
While bank products may seem like the most stable short-term investments, there are other options. Government-backed assets like Treasurys and bonds offer great stability, varying terms and low entry fees. Plus, some feature tax savings. Treasurys and savings bonds are the governments’ way of funding projects that aren’t funded directly by taxes.
Treasurys are sorted into three products–t-bills, t-notes, and t-bonds. All are selling portions of government debt, with each type featuring a different term length. For short-term investing, T-bills are the most useful, with terms ranging from one month to two years. T-bills don’t technically earn interest — instead, they are purchased at a lower than their face value; when they come to maturity, the owner keeps the difference. Even better? Profits earned on Treasury products are only taxed at the federal level, saving owners from state and local taxes.
Savings bonds are essentially a loan to the government, so it doesn’t have to take on more debt. There are two types of bonds–EE series and I-Series. EE bonds have long maturity dates, but I-bonds can be a useful tool for short-term investing, especially as part of an emergency fund. I-bonds offer an interest rate that is tied to inflation, so there is no chance of losing money on your investment.
Corporations also issue bonds, but corporate bonds carry much higher risk levels than U.S. savings bonds. Both bonds and Treasurys can be purchased directly from TreasuryDirect.gov or through a broker.
Government-backed assets offer great stability but lower earning potential than some other strategies. Keep in mind that bonds are subject to interest rate risk. When buying bonds, ensure their maturity term matches your short-term goals. While some bonds, like the series I bonds, offer higher interest rates, you’ll lose much of your earnings if you cash out too quickly.
Treasurys and bonds can also be bundled for bond funds. There are several bond funds available through most major online brokerages.
Cash management account
- All your accounts are in one place
- Can offer even greater insurance limits than traditional bank accounts
- Yields may be lower than using individual accounts
- Monthly fees or fees for dipping below account minimum thresholds can cut into profits
If keeping things simple is your goal, a cash management account is a great option. These accounts are offered through online brokerages, robo-advisors and other financial institutions and bundle your most-needed services, such as mobile check deposit, check writing, savings programs and lines of credit attached to your investment accounts. When you deposit money, the brokerage allots your balance into different accounts to earn the most interest possible, paying you interest on the total balance. That interest rate is often higher than what might be available through a traditional or online bank account.
Although cash management accounts offer interest, some may require minimum balances or include maintenance fees.
What to know before short-term investing
For most people, building wealth involves a long-term investing strategy involving a mix of stocks, bonds and real estate. But short-term investments can be an essential part of your investing journey, too. When determining your strategy, it’s important to keep two things in mind: your investment goals and your risk tolerance.
Short-term investments are best for building emergency savings and a planned near-term liability, like a down payment on a home or tuition payments, says Lauren Niestradt, senior portfolio manager at TruePoint Wealth Counsel.
“Known cash needs in the next one-to-two years should not be subject to the volatility of the stock market,” Niestradt says. Financial advisors typically say emergency funds are a key part of personal finance and recommend enough on hand to cover three- to-six months of expenses.
Here are three factors to keep in mind as you define your goals:
- Time frame: If you want to make a large purchase in the next one to two years, liquidity may be more important than growth and the higher interest rates of longer investments.
- Your investment rate: Are you throwing significant amounts of cash at your goal? Or automating a percentage of your monthly income?
- Your end use: If you need to grow your money for a purchase, you may look for higher-interest investments. Stability is more important if you want to stem the damage of inflation.
Any short-term investments on this list are relatively safe and stable, but if you have more capital to play with and higher risk tolerance, you may be willing to invest in products with a higher rate of return, such as corporate bonds.
In many of the best short-term investments, the greatest risk is losing out on higher interest rates while your money is tied up in a timed product like a CD or bond.
“The risk with any cash-like vehicle is that your return is not going to keep pace with inflation, which is certainly the case today,” Niestradt says. “But it’s still important to have some emergency savings and cash needed in the near term in a short-term cash vehicle.”
What to look for in short-term investments
When you’re ready to dive into short-term investments, there are three factors to consider: transaction costs, liquidity and stability.
Low transaction costs
Look for products with low or no fees to purchase and liquidate. If there are fees or penalties for withdrawing early, it can negate the value of the investment in the first place.
Since most short-term investments are intended for a major purchase or emergency savings, easy access is essential. High-yield savings accounts are one of the most accessible short-term investments.
If you were interested in the potential for significant gains, you would invest in the stock market. However, with great reward comes great risk. All short-term investments should be insured or backed products if you’re using your short-term investments to pay for a home or have an emergency cushion.