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7 best short-term investments

Products for investors with time horizons of between 1 and 5 years

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By

Matt Miczulski

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Some of the best short-term investments can be those that provide decent returns with minimal risk. Investors who need to access their money in a short time may prioritize preserving their capital over getting the highest possible return. Those who have more time on their side may be able to take on more risk for the potential for greater returns.
If you’re looking for some ideas for where to temporarily park your money, these are our picks of the seven best short-term investments.

Short-term investments defined

Short-term investments are assets that can be converted into cash or sold on the market within a short time. Depending on the asset, this could be anywhere from a few months to several years, but it’s generally no longer than five years.
The closer you get to your goal, the less risk you generally want to take with your money. Instead of volatile securities like stocks, investors with a shorter time horizon usually opt for assets that are more likely to maintain their value within the short term. Investors who turn to short-term assets usually value safety and liquidity the most, more so than growth. The following table outlines some investment options and potential returns over different periods.

When you need the moneyInvestment productPotential return
Under 2 years
  • High-yield savings account
  • Money market account
  • Cash management account
  • 0.15%–0.60%
  • 0.10%–0.80%
  • 0.10%–0.45%
2 to 3 years
  • Short-term bond fund
  • Money market mutual fund
  • 1.63%–3.40%
  • 0.02%–1.12%
3 to 5 years
  • Certificates of deposit (CDs)
  • Peer-to-peer loans
  • 0.10%–1.20%
  • 5%–7%

3 best short-term investments for a return in under 2 years

Investors who need to access their money within two years generally turn to assets like high-yield savings accounts and cash accounts for their safety and consistent returns.

1. High-yield savings account

  • Potential interest rate: 0.15%–0.60%
  • Consider if you’re looking for convenience and the safest place to keep your money.
  • Look elsewhere if you want more flexibility than the Federal Reserve’s six withdrawals or transfers per month allows or you want to earn a higher interest rate.

Savings accounts are one of the safest places to keep your money, period. If you bank with an FDIC-insured bank, your money is insured up to $250,000 should the bank fail.
High-yield savings accounts, in particular, pay interest rates several times higher than traditional savings accounts with brick-and-mortar banks. Though returns are one of the lowest on this list, investors who value safety above everything else but still want to earn a little interest on their money will find high-yield savings accounts an ideal investment product.

2. Money market account

  • Potential interest rate: 0.10%–0.80%
  • Consider if you value the returns of a high-yield savings account but want more access to your money.
  • Look elsewhere if you don’t want to be limited to withdrawal restrictions or are okay giving up a higher degree of safety for potentially higher returns.

Like a hybrid checking-savings account, money market accounts combine the interest rates of a savings account with some of the benefits of a checking account. Most come with debit cards and check-writing capabilities, and they sometimes pay an APY similar to high-yield savings accounts.
Money market accounts from banks are FDIC-insured, so they’re a safe place to park your money. But just like with a savings account, you’re limited to six transfers or withdrawals per month.

3. Cash management account

  • Potential interest rate: 0.10%–0.45%
  • Consider if you want the convenience of banking and investing under one roof.
  • Look elsewhere if you want to earn the best interest rate on your cash balance.

A cash management account, or CMA, allows you to bank and invest using a single account. Cash held in the account is usually FDIC-insured, and some may offer an APY comparable to a high-yield savings account. If you want to invest your money, easily transfer it to your investing portfolio.
CMAs offer greater flexibility than a standalone savings account, but every CMA is different and the types of investments offered can vary dramatically. Interest rates on CMAs are also usually lower than those offered by high-yield savings accounts.

2 best investment products for a return in 2 to 3 years

If you have two to three years before you need your money, consider investing in a short-term bond fund or a money market mutual fund. Both offer a high degree of safety and the potential for higher returns compared to high-yield savings accounts, money market accounts and cash management accounts.

1. Short-term bond fund

  • Potential interest rate: 1.63%–3.40%
  • Consider if you’re risk-averse and you want your money returned quickly.
  • Look elsewhere if you’re okay exchanging high liquidity and high security for higher returns.

Short-term bond funds are funds that invest in bonds or other types of debt securities with short maturities, usually between a year and three years. These securities include:

  • Mortgage-backed securities
  • Zero-coupon bonds
  • A mixture of types

Short-term bond funds are attractive to conservative investors for their fairly high liquidity and lower interest rate risk than long-term bond funds. But if the bond market performs poorly, it’s possible to lose your principal in a short-term bond fund.

2. Money market mutual fund

  • Potential interest rate: 0.02%–1.12%
  • Consider if you have a low tolerance for volatility and need your investment to be liquid.
  • Look elsewhere if you want greater assurance that the rate of return on your investment will outpace inflation and not lose value.

Unrelated to money market accounts, money market mutual funds invest in high-quality, short-term debt securities and are among the lowest-risk types of investments. Investment types can include:

  • Short-term US Treasury securities
  • Federal agency notes
  • Eurodollar deposits
  • Repurchase agreements
  • CDs
  • Corporate commercial paper
  • Tax-exempt municipal securities

Because they’re less risky than their stock and bond counterparts, many investors turn to money market funds for their short-term investments. And while they have the potential to offer higher returns than a savings account, returns are not guaranteed. Investors also need to consider any fund management fees that can eat into profits.

2 best investment products for a return in 3 to 5 years

Investors with a time horizon of three to five years might consider putting their money in bank CDs or peer-to-peer loans.

1. Bank CDs

  • Potential interest rate: 0.10%–0.80%
  • Consider if you want fixed, predictable returns that are better than most savings accounts.
  • Look elsewhere if you want greater liquidity without incurring early withdrawal penalties or you simply want higher returns.

Bank CDs are unique short-term investments because you can ladder your CDs to take advantage of the highest rates available without having all your money tied up for several years at a time.
For example, if you have $10,000 to invest, you might purchase five CDs for $2,000 apiece with terms ranging from one year to five years. This is called laddering. When the one-year CD matures, reinvest the cash back into a new five-year CD, recapturing the highest APY available. Each CD moves down a rung as they mature, and you can continue this process until you need to pull out the cash.
Bank CDs don’t offer the highest rates possible, and withdrawing your money before the CD matures can result in a penalty. But they’re safe and allow you to lock in a rate for the duration of the CD’s term.

2. Peer-to-peer loans

  • Potential interest rate: 5%–7%
  • Consider if you have a high risk tolerance and want the chance to earn very competitive returns.
  • Look elsewhere if you don’t want to risk losing your investment and prefer safer and more stable returns.

Peer-to-peer (P2P) loans are the riskiest asset on this list, which makes them ideal for investors who have several years on their side. P2P loans are made to individuals or small businesses, so they carry the risk of default. The risk is even greater because these loans are generally unsecured, so investors are given no collateral in the event of default.
But for this higher risk, P2P loans offer investors the potential to earn very competitive returns.

How do I choose the best short-term investment?

Start with your time horizon and decide how much risk you’re comfortable taking during that time. If safety matters most, your best options might be bank products like high-yield savings accounts or CDs. If you’re willing to take on risk for the chance to earn higher returns, P2P loans might be a suitable investment.
Do your research and decide which investment aligns best with your investment goals.

3 general rules for investing money over 5 years or less

When investing with a short window of time, consider the following tips:

  1. Determine your level of risk. When investing over a short period, there isn’t much time to recover from a loss. Decide how much risk you’re willing to take for the returns you desire in the time available to you.
  2. Coordinate your goals with your assets. Once you know your specific time horizon, invest in assets that align with your timeline.
  3. Adjust your investments as you approach your investment goals. As your time horizon gets shorter, it’s a good idea to take on less risk. While you might decide to start with riskier, more rewarding investments when you’re years out from your goal, you might consider moving your money to safer assets as you approach your investment goal.

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