Do you have short-term goals you’re saving up for? Are you interested in growing the money you’re setting aside for it?
Maybe you’re building an emergency fund. Maybe you’re saving for a car or a down payment on a home. Perhaps you’re planning a nice vacation for next summer.
If you want to use your funds in the not-so-distant future, you’re probably not comfortable taking much risk.
Does that mean you’re stuck earning 0.1% or some similarly depressing rate in a big bank savings account?
There are short-term investment options that can help grow your money even when you don’t have 20 years to spare.
What are Short-Term Investments?
Short-term investments are simply investments that won’t be invested for long. It means you plan to take the funds out of the investment vehicle within a relatively short timeframe.
What’s a short timeframe? Well, that’s open to interpretation. I consider it to be five years or less. And because they are short-term investments, they shouldn’t be investments with relatively low risk.
Risky, volatile investments (like stocks) are best-suited to long time horizons. Why? Because these kinds of investments can see large fluctuations in value.
That isn’t a big deal if you don’t plan to touch it for 20 years. But if you want that money for a vacation next year or for a down payment in 3 years, you can’t afford to risk a big loss. While long-term investments have time to recover from big fluctuations, short-term ones don’t.
The best short-term investments offer you the opportunity to grow your money without taking big risks.
Best Short-Term Investments
These 11 short-term investments check all the boxes. They all offer some growth, are relatively low-risk, and are accessible within five years.
Online Savings Accounts
Seeking a risk-free, 100% liquid short-term investment? Want to earn more than you would on a checking account? How about more than a traditional savings account?
High-yield savings accounts are the answer.
These accounts are like a traditional bank account, except they are typically offered by an online bank. That means no debit card, no checks, and only self-serve transactions. These days, more and more people are comfortable with this kind of setup.
Most online savings accounts are FDIC-insured up to $250,000 just like traditional bank accounts, so your money is 100% safe.
The best high-yield savings accounts almost always pay higher rates than traditional banks. The CIT Bank Saving Builder Account pays a top rate of 1.25% APY. For FDIC-insured money you can access anytime, that’s pretty great!
Money Market Accounts
Money market accounts are offered by banks and credit unions and typically pay higher interest rates than traditional savings accounts (but not necessarily more than high-interest online savings accounts).
There’s usually a minimum deposit required to open the account, and some charge monthly fees if your balance drops below the stated amount. That minimum might be as low as $100, though, so it’s easy to maintain.
Like CDs and online savings accounts, money market accounts are insured by the FDIC (or NCUA for credit unions) making them a risk-free investment.
Unlike CDs and online savings accounts, some come with debit cards and check writing capabilities. This means your money is more accessible, although that may not be important to you if you’re trying to save.
BBVA has a nice money market account that we really like. Find their latest rates and learn more using the link below.
Certificates of Deposits
With a certificate of deposit (CD), you lock in your money for a set period, called a term, in exchange for a guaranteed interest rate.
Terms range from a few months to five years. Obviously, you want to keep your term short if you’ve got plans for the funds in the near future.
Like online savings accounts, CDs are FDIC-insured, making them one of the safest investments around.
The downside, compared to online savings accounts, is that your money is less accessible. Most CDs charge a penalty if you withdraw your funds before your term is up. That’s why it’s important to choose a term that aligns with your goals.
Again, CIT Bank offers some great term CDs worth checking out – especially their 18-month CD.
Worthy is a platform for buying bonds that fund fully secured loans to U.S. small businesses. Because the loans are secured by the business’ assets, it’s a fairly low-risk (but not risk-free) investment.
Bonds only cost $10 and pay a fixed 5% interest rate. Although the terms are for 36 months, you can cash out early with no penalties or fees.
All in all, Worthy Bonds are fairly flexible short-term high-yield investments.
U.S. Treasury Securities
Treasury securities are federal government-backed bonds used to raise capital. You’re essentially loaning money to the government in exchange for interest payments.
Short-term Treasury securities include T-bills and T-notes. Because they’re guaranteed by the government, they are some of the safest short-term investments available.
Treasury bills, or T-bills, have short maturities, ranging from 4 weeks to 52 weeks. They’re typically sold in denominations of $100.
So how do you make money from T-bills? You buy them at a discount, relative to their “face” value. When they mature, you get the full face value. So, the difference between the purchase price and the face value is your profit (assuming you hold it to maturity).
Say you bought a $1,000 T-bill for $970 and held it to maturity. You paid $970, but you get back $1,000, so you made $30. That’s a 3% return.
T-notes are sold in increments of $100 and have maturities of 2, 3, 5, 7, or 10 years. Because the terms are longer, they typically offer greater returns than T-bills.
They offer fixed interest rates and make payments every six months. Interest and principal are guaranteed if held to maturity. You can sell before then, but your principal isn’t guaranteed.
Interest rates are low, but they’re better than what you’d earn letting your money sit in a checking account. Additionally, interest earned on Treasury securities is exempt from tax at the state and local levels (but still subject to federal tax).
You can purchase T-bills or T-notes at auction using the government’s online marketplace, TreasuryDirect. You can also opt to invest in mutual funds or exchange-traded funds (ETFs) that hold these securities instead.
Treasury Inflation-Protected Securities (TIPS)
TIPS are a special type of government-backed bond that are indexed to inflation. They pay a fixed interest rate semi-annually, but the value of the bond is adjusted over the term to keep pace with inflation.
So, what does that mean for you? If the value of the bond increases, you earn interest on a higher amount, which means more money in your pocket.
You can buy TIPS directly from the government for 5, 10, or 30-year terms in $100 increments. When you hold TIPS to maturity, your principal and interest rate are guaranteed, making them a very low-risk investment.
Obviously, though, 10 or 30 years can’t be considered short-term, though 5 years can be. The thing is, you’re able to sell TIPS before maturity. The only catch is that if you do, you forfeit the guarantee on your principal. Therefore, selling before maturity is only a good idea when the price is right (or if you really need the money).
As with other Treasury securities, you can also invest in TIPS by buying mutual funds or exchange-traded funds (ETFs) that hold them.
Short-Term Municipal Bonds
Municipal bonds (AKA munis) are similar to government-backed bonds, but the “government” is a county, municipality, or state. Although they’re still fairly low risk, they aren’t as secure as T-bills, T-notes, and TIPS.
One of the major benefits of munis is that the interest you earn on them is usually exempt from federal tax, and often from state tax, as well. Less money in the tax man’s pocket is more money in yours, and that’s always a win.
Short-Term Corporate Bonds
Corporate bonds work similarly to government-backed bonds, except they’re backed by a corporation instead of the government. For this reason, they carry a greater risk than Treasury securities and municipal bonds. That said, they may pay a higher interest rate, too.
Like government bonds, you can buy individual short-term corporate bonds or invest in mutual funds or ETFs that hold them.
Peer-to-Peer lending has the potential to be one of the most lucrative short-term high-yield investments. It’s when borrowers bypass the bank and borrow money from real people, using a lending platform. As an investor, you can put up money to fund someone’s loan and collect interest on the payments.
Lending Club and Prosper are popular peer-to-peer lending platform that lets you select the loans you want to invest in. Rates depend on the borrower’s credit, and as you might expect, borrowers with poor credit tend to pay the highest interest rates. Of course, those loans carry the highest risk, so you have to find a balance you’re comfortable with.
You need $1,000 to get started, but you can invest as little as $25 per loan. Spreading your money out over multiple loans might be a good strategy if you’re looking to minimize risk.
Lending Club loans have three or five-year terms, so you can choose the length that best suits your goals.
Credit Card Rewards Offers
This isn’t an investment in the strictest sense, but taking advantage of credit card rewards can be a smart way to put your money to work for you.
It works like this:
- You sign up for a credit card that comes with an attractive signup bonus and waives the annual fee for the first year. Let’s use the Capital One Venture Rewards card as an example.
- If you spend $3,000 in the first three months, you get 50,000 bonus points—that’s worth $500 in travel.
- If you spend that $3,000 on things you had to buy anyway—groceries, gas, utilities, your cell phone, etc., you basically get a free $500. That’s effectively like getting 17% back.
- Learn how to apply here
If you’re going to get into credit card rewards, just make sure you never charge anything you can’t afford. And always pay your bill on time and in full each month, no matter what. Interest charges negate the value of even the most lucrative rewards.
Paying Off Debt
Ok, so paying off debt isn’t technically an investment, either. The truth is, however, it’s possible to save a lot more by paying off debt than you would make on most short-term investments.
Don’t believe me? If you carry a $5,000 balance on a credit card with 20% APR and you pay the minimum each month, you’ll pay close to $6,000 in interest – that’s more than the $5,000 you put on the card. Pay it off, and you effectively save yourself $667 a year!
I can’t think of a single investment with a guaranteed return that high, can you?
While you won’t make a killing on any of these short-term investments (except the last two pseudo-investments), they certainly beat leaving your money to stagnate in your checking account.
After all, modest growth opportunities are better than nothing, and most short-term investments are relatively low on the risk scale.
What short-term goals are you working toward? Are you using any of the investment strategies discussed in this article? Let us know!