Short-term Investments: 5 Best Options Right Now

Inflation, volatile financial markets and recession fears can make now feel like the wrong time to invest. At the same time, the risk of hoarding cash is also high: Those dollars under the mattress don’t keep pace with inflation, buying less and less over time.

A short-term investing or savings account is an easily accessible place to park money for near-term goals while also earning some interest.

What are short-term investments?

A short-term investment is an investment that you can easily convert to cash, such as a high-yield savings or money market account. This is money you might need sooner rather than later.

If you’re investing in the stock market, it’s generally considered a good idea to plan to keep your money invested for at least five years.

But a savings goal of five years or less doesn’t mean you need to let your cash sit idle that whole time. There are several ways to help your money grow, even in a limited time frame.

In this article, we break down the various investments for the specific time frame you need. This includes:

Short-term investments offer different interest rates and investment returns than long-term investments. For the most part, growing money short-term through interest-bearing accounts is extremely low risk. You go into the agreement knowing how much interest you’ll earn over a preset period of time.

Investing in stocks, on the other hand, is far from certain. After a market plunge, it could take months or years to get your money back. High returns typically require a willingness to take on more risk, while low returns often come with the comfort of low risk — or none at all.

So, how do you find a balance? Here’s a guide to short-term investment and savings options based on your timeframe.

		Potential return: 4% to 5%, which is significantly better than the average at traditional banks.
		Medium-risk, medium-reward. Potential return: 4% or more for U.S. government bond funds. Potentially more for riskier bond funds.
	Bank certificates of deposit (CDs).	Low risk, medium-high reward. Potential return: Around 3% to 4% among banks reviewed by NerdWallet.

Investments for money you need in less than 2 years

Online savings account or money market account

Potential interest rate: 4% to 5%.

NerdWallet’s analysis shows that the annual percentage yields for high-yield online savings accounts and money market accounts are currently between 4% and 5%. This may not sound like much, but it’s higher than 0.43%, the current national average interest rate on savings accounts and what you’ll likely be offered at your hometown branch [0].

Both savings and money market accounts are FDIC-insured, meaning your money is protected up to $250,000 per institution, per depositor, in case of a bank failure.

I had the misconception for a long time that there must be a “catch” to earning interest through a high-yield savings account. I assumed they must charge fees, require a steep minimum deposit, and have strict rules around withdrawals. Because of this, it didn’t seem like the right place to keep my emergency fund. Now, I wish I would have done my research sooner. In reality, there are many high-yield savings accounts that don’t have these drawbacks. Don’t let your assumption scare you away from earning interest on your savings.

Bella Avila, Content Management Specialist

Advertisement

NerdWallet rating NerdWallet’s ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities. 4.8 /5	NerdWallet rating NerdWallet’s ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities. 5.0 /5	NerdWallet rating NerdWallet’s ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities. 4.6 /5
Fees  $0 per online equity trade	Fees  $0.005 per share; as low as $0.0005 with volume discounts
Promotion  None no promotion available at this time	Promotion  Exclusive! U.S. residents who open a new IBKR Pro account will receive a 0.25% rate reduction on margin loans. Terms apply.	Promotion  Earn up to $10,000 when you transfer your investment portfolio to Public.

Cash management account

Potential interest rate: Between 3% and 5%.

Another alternative for short-term savings is a cash management account. These accounts are typically offered by robo-advisors and online investment firms (or discount brokers). Some cash management accounts provide check writing, mobile check deposit, bill pay, money transfers, goal-setting and overdraft programs.

Investments for money you need in 2 to 3 years

Short-term bond funds

Potential interest rate: 4% or more for U.S. government bonds, more for those willing to take on more risk.

Many U.S. government bond funds currently lag behind the annual return of high-yield savings accounts. Corporate bond funds — particularly high-yield funds — may return more, but with more risk.

Investments for money you need in 3 to 5 years

Bank certificates of deposit, or CDs

Potential interest rate: 3% to 4%, depending on CD term.

CDs can be a good risk-free savings option for money you are sure you don’t need for a set period of time. CDs offer a pre-set, guaranteed interest rate if you lock your money away for a set term (ranging from three months to five or more years). In general, the longer the term, the higher the interest rate.

Remember that you may want to avoid locking your money up in a long-term CD when interest rates are rising, as they are now. If you need to withdraw your money before the CD term ends, you’ll typically pay a penalty of three to six months’ interest. Also, note that CDs may have a minimum deposit requirement.