When it comes to investing, there’s an abundance of advice about how stashing your money for the long haul is the best way to accumulate wealth. But in the course of your financial life, you might frequently find yourself in need of short-term investments where the rewards won’t take decades to build up. If you know you’re going to need to access your money in the near future, don’t just assume you’re relegated to a checking account.
Although you can’t expect to earn a lot in such a short time frame, here are some short-term investment options that will keep your money growing and accessible.
What Are Short-Term Investments?
Short-term investments, also known as temporary investments, are investments made with the expectation of a limited timeline — typically one to three years or less. Unlike long-term investments, which can yield a greater return over time, short-term investments are typically lower-risk investments with a predictable, smaller return and are highly liquid.
For assets you might need quick access to in the near future — like an emergency fund or cash saved for a down payment on a house — you can’t afford an investment that might put those funds at risk. That means staying away from stocks, which typically require the ability to wait out the natural rhythms of the market. No matter how good an investment in Company A might be over time, if the company reports a dip in profits the day before your basement floods and requires $10,000 in immediate repairs, you’ll have no choice but to “sell low” if your emergency fund is tied up in shares.
As such, short-term investments usually sacrifice big returns in favor of minimal risk and the ability to exit a position quickly and easily if/when you need access to your savings. So although they might not accumulate compound interest for long enough, short-term investments can still provide a healthy return without taking chances.
Best Short-Term Investment Options
Several different short-term investment options exist, and each can serve a different purpose in your portfolio. Consider investing in a few different short-term investments to meet your various financial goals.
1. Savings Accounts
Money in a savings account at a bank or credit union is almost always insured for up to $250,000 by the FDIC or National Credit Union Administration, making this type of account a very low-risk investment. In addition, savings accounts and money market deposit accounts allow you to withdraw all of your funds at any time without incurring a penalty.
You can maximize the interest you earn on your savings by choosing a high-yield savings account, typically offered by online banks that don’t have to pay for owning and operating physical branches. Just be sure any savings account you use is either FDIC or NCUA insured.
2. Brokerage Money Market Mutual Funds
Although bank and brokerage money market accounts might sound the same, they aren’t. A money market mutual fund is a low-risk mutual fund that holds investment-grade, short-term government bonds — and sometimes AAA-rated corporate debt — that mature between 30 and 90 days.
Like a typical mutual fund, an MMF sponsor pools investors’ savings into a fund typically organized as a trust. However, in this case, the MMF is focused on only the most stable types of assets and allows investors to make fixed-income investments that they can redeem at any time with minimal risk to them. Although returns aren’t great, they have improved in recent years and present a safe, easy way to invest in the short term.
3. Certificates of Deposit
A certificate of deposit is a time deposit account — issued by banks and credit unions — that works like a promissory note. In exchange for a competitive, fixed interest rate, you’re required to keep your money in the account for a specified amount of time. CD term lengths range from a few months to five or more years, with longer terms typically yielding higher rates.
However, if you withdraw money from the CD before its maturity date, the withdrawal is subject to a significant penalty fee. That means that CDs are best suited for someone who has a clear sense of when they will need their money. Although not well-suited for an emergency fund, someone saving up for a purchase they know they’ll be making in six months could find a CD to be a good option.
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4. Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities are marketable securities designed to protect investors from inflation, and their principals adjust according to changes in the consumer price index. TIPS are issued with maturities of five, 10 and 30 years and pay interest twice a year.
You can invest in TIPS with a minimum of $100, and you can purchase additional TIPS in increments of $100. You need to hold the TIPS for 45 days before you can cash out, so they aren’t totally liquid, but they come with virtually no risk and can protect your cash assets against inflation.
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5. Series I Savings Bonds
A Series I savings bond is an interest-bearing U.S. savings bond designed to protect against inflation. This investment has two return components and will earn interest for up to 30 years. The first component is a fixed interest rate set at issue — just like any other treasury. The second interest rate is based on inflation and gets readjusted twice a year. Series I savings bond interest payments are free from state and local taxes and are completely tax-free in some cases — such as when you use them to pay for qualified educational expenses.
Although this is a very safe way to invest, Series I savings bonds aren’t as liquid as some short-term investors might need. You must hold them for at least a year before cashing them in, and cashing them in before five years have passed means sacrificing the last three months of interest, so this option isn’t for you if you will need your cash before then. Not to mention, you’re limited to $10,000 a year in Series I bonds, so you might need additional options if you have more than that to invest.
6. Short-Term Bond Funds
A short-term bond fund is a mutual fund that invests in bonds with typical maturity terms between a few months and five years. The types of bonds in the fund’s portfolio can vary. Fairly conservative investors favor short-term bond funds because they’re less sensitive to interest rates than portfolios with longer durations.
Although short-term bond funds can lose value if interest rates rise, they’re less risky than long-term bond funds because of the short duration of their underlying bonds. For example, if rates go up and a bond in the fund has a maturity of two years, you’re stuck with the lower rate only for those two years. If it were a 20-year bond, you’d be stuck with the low rate for a lot longer.
The type of bonds, length to maturity and rates can all vary widely depending on the fund, so be sure to do your research first.
7. Individual Short-Term Bonds
Of course, if you’re not interested in bond funds, there’s nothing stopping you from going straight to the source and investing in short-term bonds directly. Bonds typically offer very clear terms — from the interest rate to the date to maturity — and they’ll come with letter grades from rating agencies to give you a sense of how risky each one is.
Clearly, the risk involved depends on the bonds you’re buying, and you will have to be careful about matching the maturity date to your needs lest you be forced to sell prior to maturity and risk the volatility of the secondary bond markets, but if you’re ready to shop around, you can find a very safe way to earn interest on a set, short-term schedule.
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8. Peer-to-Peer Lending
Peer-to-peer lending involves making loans to other people — often complete strangers. Borrowers simply post loan listings on different peer-to-peer websites for investors to review, so you decide to whom you want to lend. Peer-to-peer lending standards are significantly more lenient than banks’, and these loans’ interest rates are usually lower than those offered by traditional lenders, but the rates will likely exceed those on high-yield savings accounts, so you stand to make a much higher return with peer-to-peer lending.
Although peer-to-peer loan sites help evaluate risk for the lender, it’s important to keep in mind that these loans are unsecured and you could lose your investment — unlike a savings account or U.S.-issued bond. They also lack liquidity. There isn’t a secondary market for selling your loan, so you might be forced to hold it for the length of the terms. If you can’t risk losing your money or not having access to it for a few years, you should look elsewhere.
9. Exchange-Traded Funds
The ETF investing most people are familiar with involves stocks, but the ETF is a fairly malleable vehicle with plenty of very low-risk options, including short-term bond ETFs that function just like their mutual fund counterparts. So, although investing in the more popular stock index ETFs doesn’t present a great opportunity for short-term investments, there are also plenty of other ETFs that could allow you to make quick, diversified investments that have minimal risk and can be sold off at any time.
Do Your Short-Term Investment Homework
Whether you’re an aggressive or conservative investor, you should consider keeping a portion of your money in short-term investments. With that in mind, remember that, in general, reaching for higher yields means assuming greater risk.
To determine your options, figure out how much money you want to put in short investments and allocate your capital in line with the amount of risk you’re willing to assume. Whichever option you choose, make sure you do your research to discover the highest yields available for your investment selections to invest your money well.
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