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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.
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:
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
Risk vs. reward
Less than two years
Two to three years
Three to five years
Investments for money you need in less than 2 years
Online savings account or money market account
Potential interest rate: 2% or more
NerdWallet’s analysis shows annual percentage yields for high-yield online savings accounts and money market accounts is currently around 2.0%. This may not sound like much, but it’s higher than 0.24%, 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.
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: 0.01% to 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 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.)
» 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 3%
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
Potential interest rate: 3 to 7%
On the riskier end of the short-term investment spectrum are peer-to-peer loans. An online lender like Prosper is one option for investors who are willing to lend money to borrowers who need cash for anything from home renovations to medical expenses.
Through sites like this, borrowers are classified by creditworthiness, which means you can limit risk — but not avoid it completely — by choosing to lend only to borrowers in the upper credit tiers. You’ll earn less in interest focusing on these choice candidates, but the potential return still is substantially greater than a savings account.
To lower risk further, consider diversifying by spreading loans around into small chunks, lending $25 or $50 to each candidate rather than, say, $2,500 to one. When a borrower makes a payment, it’s distributed to the loan’s investors, and you can either withdraw or reinvest it. Investors typically pay a service fee, so be sure to note that in your calculations.