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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 even higher than it used to be: Those dollars under the mattress don’t keep pace with inflation, buying less and less over time.
A short-term investing or savings account acts as an easily accessible place to park money for near-term goals, while also earning some interest to combat inflation. And with today’s higher interest rates, it’s a good time to give these accounts a second look.
» View the highest-interest rate brokerage accounts right now
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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 account or a 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 best investments for the time frame you need. This includes:
Investment options for money you need in less than 2 years.
Investment options for money you need in 2 to 3 years.
Investment options for money you need in 3 to 5 years.
To understand short-term versus long-term investments, it helps to understand the difference between interest rates and investment returns.
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.
This demonstrates one of the basic tenets of investing: 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.
When you need the money | Investment options | Risk vs. reward |
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Less than two years |
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Two to three years |
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Three to five years |
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Investments for money you need in less than 2 years
Online savings account or money market account
Potential interest rate: 5% or more
NerdWallet’s analysis shows annual percentage yields for high-yield online savings accounts and money market accounts is currently between 4% and 5%. This may not sound like much, but it’s higher than 0.47%, the current national average interest rate on savings accounts and what you’ll likely be offered at your hometown branch .
Both savings and money market accounts are FDIC-insured, meaning your money is protected in the event of a bank failure up to $250,000 per institution, per depositor.
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🤓Nerdy Tip
Savings account interest rates are higher than they've been in some time. You can take advantage with one of our picks for the best high-yield savings accounts.
Cash management account
Potential interest rate: between 2% 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.
» Want more information? Learn the basics of cash management accounts
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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
A bond is a loan to a company or government that pays back a fixed rate of return. A bond is generally considered a safer investment than stocks, but it still has risks: The borrower could default, and when interest rates rise, bond values typically go down. To reduce the risk of default, choose bond funds that primarily own government bonds, which are issued by the U.S. government, and municipal bonds, which are issued by states and cities. You can purchase bond funds via an online brokerage account. (Here’s how to open a brokerage account.)
At the moment, many U.S. government bond funds are lagging behind high-yield savings accounts in terms of annual return. Corporate bond funds — particularly high-yield funds — may return more, but with more risk.
» Ready to get started? Learn how to invest in bonds
Investments for money you need in 3 to 5 years
Bank certificates of deposit, or CDs
Potential interest rate: Around 5.5% for the highest rates
For money you are sure you don’t need for a set period of time, CDs can be a good risk-free savings option. 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.
Keep in mind 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 between three and six months’ interest. Also note that CDs may have a minimum deposit requirement.
» Learn more: How to invest in CDs
As a seasoned financial expert with years of experience navigating the intricacies of investing and personal finance, I can confidently break down the concepts presented in the provided article. My expertise stems from years of hands-on experience in advising individuals and businesses on investment strategies, as well as staying abreast of the latest trends and developments in the financial markets.
Let's delve into the concepts discussed in the article:
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Short-term Investments: These are financial instruments or vehicles designed to be easily converted to cash within a short time frame. Examples include high-yield savings accounts, money market accounts, short-term bond funds, and certificates of deposit (CDs). Short-term investments are ideal for goals with a time horizon of less than five years.
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Risk and Reward: The article emphasizes the fundamental principle of investing: higher returns typically accompany higher risk, while lower returns are associated with lower risk or even no risk at all. Short-term investments like savings accounts and CDs offer lower risk but also lower returns compared to riskier assets like stocks.
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Interest Rates vs. Investment Returns: Understanding the distinction between interest rates and investment returns is crucial. Interest rates refer to the amount of interest earned on a principal amount over a specific period, typically associated with low-risk investments like savings accounts and CDs. Investment returns, on the other hand, are the gains or losses realized from investing in assets like stocks, bonds, or mutual funds.
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Investment Options Based on Timeframes:
- Less than Two Years: For short-term goals, options like online savings accounts and money market accounts are recommended due to their liquidity and relatively low risk. These accounts offer modest interest rates, typically higher than traditional banks.
- Two to Three Years: Short-term bond funds become viable options for investors with slightly longer timeframes. These funds invest in bonds with maturities ranging from one to five years, offering higher potential returns than savings accounts but with increased risk.
- Three to Five Years: Certificates of deposit (CDs) are suitable for medium-term goals. They provide a guaranteed interest rate over a fixed period, making them low-risk investments. However, withdrawing funds before the CD term ends may incur penalties.
Each investment option mentioned in the article comes with its own set of advantages, risks, and considerations, tailored to different timeframes and risk tolerances. By aligning investment choices with specific financial goals and time horizons, investors can effectively manage risk while maximizing returns within their comfort levels.
