Need a place to park your cash and earn some interest?
Maybe you’re saving up for a kitchen remodel, summer cabin, seed money for a new business, or some other near term investment. Any money to be used in less than 2-3 years needs to stay out of the stock market, period. The stock market is simply too volatile for such a short-term time frame.
This is where short-term investments come into play. Your money will grow and earn compound interest, yet you still maintain easy access to your money for when you need it.
We’ve put together a list of the best short-term investments available. While everyone’s needs and circumstances are unique, here are 10 high-quality options.
1. Online Savings Accounts
If you don’t like taking big risks, a high yield savings account may be a good fit. While interest rates aren’t soaring (don’t expect to keep up with inflation), you can guarantee your investment and generate a small return. Additionally, you’ll maintain liquidity, as many banks allow multiple withdrawals per month.
Our favorite is Ally bank, which usually has the highest rates around and includes FDIC insurance (up to $250,000 of your money is insured by the government–it’s as safe as it gets).
2. Certificates of Deposit
Like an online savings account, CDs don’t pay much but they are guaranteed investments and FDIC insured. You can invest in one for a short time period (as little as one month) or for 10+ years. Usually, interest rates increase the longer time period you choose. Here is a succinct article that explains more about CDs, the benefits, and drawbacks of using them. You can use a website like Bankrate to compare the interest rates available from dozens of different banks.
One caveat is that you’ll want to avoid pulling the money out before the CD’s maturity date or you’ll pay a fee, which is often equal to three months worth of interest.
3. Pay Off Debt
Do you have credit cards or loans with high interest rates? If you have extra cash, paying them off is a great return on your investment. It’s simple. If you have a credit card with an 18% interest rate, you will get an immediate and guaranteed 18% return. There is no investment on the planet that will give you an 18% guaranteed return. Pay yourself first.
To reap the greatest reward, aim to pay off your highest interest rate debts first. Or, if you feel like you need more motivation, try the snowball method and pay off the smallest sized loan first, regardless of the interest rate. As you pay off smaller accounts, it may motivate you to continuously pay off your debt. This really works and I’ve used it with clients in the past.
4. Municipal Bonds
Although some lower quality “muni” bonds (as they are often called) can be a little risky, most muni bonds are quite safe. They also come with the added perk of interest that is exempt from federal income tax (great for high-income earners). Moreover, if you buy a muni bond in your home state, you’ll also be exempt from state income tax too.
Just remember, if you sell before maturity, you may lose money if the bond loses value. For a short-term investment, you may consider buying a bond with a maturity that matches the date you will need the money.
5. Peer-to-Peer Lending
Broaden your investment portfolio and spread out your investments using a lending website. Websites like Lending Club connect investors to qualified consumers who need a loan. The investors serve as a bank, providing a percentage of the loans. As an investor, you can purchase notes and receive a monthly income from the interest and loan repayment.
Loans range in size from a few hundred dollars to more than $10,000, so you can choose how much to invest based on your risk level.
6. Roth IRAs
It may sound strange, but a Roth IRA can serve as a short-term investment. A Roth IRA offers you access to mutual funds, ETFs, bonds, and other types of investments to earn a higher rate of return.
Additionally, with a Roth IRA, there are no early withdrawal penalties on your contributions (only the earnings on your money has withdrawal caveats). For example, if 2 years ago you deposited $2,000 into a Roth IRA, and it grows to $3,000 today, you can still access that initial $2,000 completely tax- and penalty-free. It’s that $1,000 of gain that has early withdrawal penalties attached to it. Keep in mind, transfers can take a few days and you might have to sell investments at an inopportune time to cash out.
7. Cash Back Rewards
Some credit cards offer significant rewards that require little work on your end. Depending on the card, you may be able to earn cash back for your points. As a side note, credit card rewards websites tend to subtly discourage you from getting cash back and push you towards the merchandise rewards. But if you look carefully, you can usually find the actual cash rewards. You can then invest the cash in one of the short-term investments outlined in this article.
You may consider making your everyday purchases with a credit card instead of cash in order to earn rewards. NerdWallet offers a great overview of the best credit card rewards. Whether you want to earn miles for travel, gift cards, or cash, there’s a card for just about any type of reward.
8. Short-Term Bonds
Short-term bond funds, which can be conveniently purchased as mutual funds and ETFs, can be relatively stable and still offer decent returns. Most come with check-writing features, which makes them convenient to use when needed. While government bonds are more secure than corporate bonds and less sensitive to interest rate fluctuations, they’ll pay less. You can expect to receive interest rates slightly higher than an online savings account.
*Remember, risk and reward are tightly intertwined: You are taking a little more risk in a short-term bond fund compared to a savings account, and therefore slightly better compensated.
One of our favorite funds is the Vanguard Short-Term Bond Index (tickers: VBISX as a mutual fund, and BSV as an ETF flavor).
9. Money Market Accounts
Similar to a savings account, money market accounts can pay similar rates to one-year CDs, but you’ll have immediate access to your funds if needed and you won’t face a penalty for early withdrawal. Some banks offer high-yield savings accounts, which offer slightly higher interest rates than the average savings account.
Online banks usually can offer a slightly higher interest rate because they don’t have the overhead costs that brick-and-mortar banks do. Once again, Ally Bank gets our top pick here.
10. Treasury Inflation-Protected Securities
These investments, more commonly referred to as “TIPS” for short, are designed to protect investors from the wealth-destroying effect of inflation. TIPS are essentially treasury bond investments that also adjust their return to compensate for inflation. So you get the protection of a treasury bond that is backed by the full credit and faith of the US Government, with the added benefit of inflation protection.
Our favorite pick here is Vanguard Short-Term Inflation-Protected Securities Index (tickers: VTIPX as a mutual fund, and VTIP as an ETF flavor).
Now that you have your short-term investments figured out, what about the rest of your investments? We’ve got you covered there too! Gain total control of your money and build wealth smarter by downloading our free Wealth Building Checklist here.
For many people, a 401k is their largest retirement account. It deserves your undivided attention. Download our Ultimate 401(k) Guide for a step-by-step strategy to master your 401(k), including a prioritized checklist. It’s free!
Pathway founder and principal Greg Brown is a fee only financial advisor with broad financial planning and investing expertise. Greg’s financial advice has been featured in publications like Yahoo Finance, Bankrate, Investopedia (all articles here), Wall Street Journal, and USA Today. He holds a master’s degree from the University of Chicago and a mechanical engineering degree from Michigan State University. Prior to Pathway, Greg was a lead analyst at Morningstar and previously held engineering roles at Dell (including a US Patent).
Also published on Medium.