Long-term investing is the key to compounding your gains and building wealth over time, but you also want to have something you can tap into when you need quick cash. That’s where short-term investments come in.
The best short-term investments forego outsized gains in exchange for lower risk and higher liquidity. An ongoing bear market, high inflation and the looming threat of a recession have convinced many investors to defend their principal with short-term investments that ensure their cash will be there when they need it.
If you’re looking to rein in your riskier investments and keep your wealth liquid, these are the short-term money-growing vehicles you should consider.
8 Best Short-Term Investments
Here are a few of the best short-term investments to consider for 2023.
1. High-Yield Savings Accounts
Thanks to the end of historically low interest rates, high-yield savings accounts are once again a reality. The current national average deposit rate is 0.33%, according to the FDIC, but many banks and credit unions offer high-yield accounts with rates of 3.50%, 4.00% or more.
- Your deposits are fully insured.
- Full liquidity and easy access to cash — with a high-yield savings account, you can make up to six free transfers or withdrawals per cycle.
- Inflation can outrun your gains over time.
- Some banks charge fees or have minimum balance requirements.
2. Short-Term Corporate Bond Funds
Corporations issue bonds to raise money, and in return, they pay interest on the principal. When you buy corporate bond funds, you’re investing in debt issued by many different companies.
- Corporate bonds typically pay higher yields than bonds issued by governments.
- Highly liquid assets that you can buy and sell on the financial markets.
- Higher yields come with greater risk and higher taxes than government bonds.
3. Money Market Accounts
Money market accounts offer the best features of checking and savings accounts — high yields and the ability to write checks and use a debit card. The highest-yielding money market accounts now boast rates approaching 4.50%.
- Comparatively high yields.
- Highly liquid with easy access to your cash.
- Can have high minimum balance requirements.
- There are sometimes restrictions on withdrawals.
4. Certificates of Deposit
CDs are savings deposits that pay higher rates than standard savings accounts, but require depositors to lock their funds for a fixed period of time, called a term. Terms can be as short as three months or as long as 10 years or even more, but most commonly, CDs have terms of six months to five years. Generally, the longer the term, the higher the yield.
- FDIC-insured, so your investment is safe.
- Wide range of maturities available.
- Withdrawals before maturity incur penalties.
5. Cash Management Accounts
Online stockbrokers and robo-advisors offer cash management accounts, which let you unify your day-to-day cash and your investment money in the same account.
- Easy and convenient access to checking and investment cash in one place.
- Lower rates than high-yield savings accounts.
Treasury bonds, notes and bills are debt instruments that pay fixed rates in exchange for locked deposits of varying terms, just like CDs and corporate bonds. But instead of loaning money to a bank or a company, you’re loaning it to the government when you buy T-bills, T-bonds and T-notes.
- Backed by the full faith and credit of the United States government, Treasuries are among the safest investments in the world.
- Wide variety of terms from three months to 30 years.
- Generally exempt from taxation.
- Lower yields than corporate bonds.
7. No-Penalty Certificates of Deposit
A no-penalty certificate of deposit allows you to avoid paying typical bank fees if you opt out before the CD matures. In general, CDs offer higher returns than money market accounts and savings accounts.
- FDIC-insured up to $250,000 per account.
- You are free to withdraw your investment without paying a fee.
- Lower rates and more limited terms than regular CDs.
8. Money Market Mutual Funds
While money market mutual funds sound similar to money market accounts, they’re very different. A money market mutual fund allows you to invest in a pool of securities, such as municipal securities or corporate debt securities. These types of investments typically provide higher returns than other interest-bearing accounts.
- You can access your money when you need it.
- Comparatively high return on investment.
- Your deposits are not federally insured.
Short-term investments don’t offer the potential of dramatic gains over time like stocks and mutual funds — but they avoid the risk associated with equity investing, as well. Most experts recommend a blend of both long-term investments with money that you can afford to lose and short-term investments for cash on hand.
FAQs on Short-Term Investments
Here are the answers to some of the most frequently asked questions making short-term investments.
- What is considered a short-term investment?
- A short-term investment is any financial asset that you can easily convert into cash, typically in five years or less.
- What are three short-term investments?
- A few short-term investment options are high-yield savings accounts, corporate bonds and certificates of deposit.
- All of the above-listed options can be short-term investments – but they don’t have to be. Treasuries and CDs, for example, let you park your money for a decade or more, if you choose, and vehicles like savings and money-market accounts don’t have any terms or time limits.
- Where can I invest $10,000 for one year?
- While the best way to invest any sum of money depends on your goals and strategy, Series I bonds offer some of the highest returns on the market — currently 6.89%. The yields on these securities change with the inflation rate, which makes them an excellent hedge in times of rising prices. You can buy a maximum of $10,000 worth and hold them for as short a term as you like or as long as 30 years.
- What’s the best way to invest $5,000 short term?
- Paper I bonds are similar to standard I bonds, but you can buy them with your tax refund in any amount up to $5,000.
- Where can I invest for three months?
- Some CDs offer three-month terms, as do some Treasuries. However, if you don’t want to lock your money for any term, choose a fully liquid alternative like a high-yield savings or money market account.