There’s a downside to the low interest rates that have helped you save money on a mortgage or student loan refinance: The same low rates apply to the types of safe accounts recommended for short-term savings — bank savings accounts, CDs and money market accounts.
By comparison, the stock market has been on a tear. But the market is not a good option for your short-term savings, unless your time horizon is long enough (at least five years) to recover from a downturn.
So where can you earn decent returns without putting your money at risk? Here’s NerdWallet’s guide to the best short-term investments based on your timeframe.
|When you need the money||Where to put it||Potential interest rate||Risk||Reward|
|Less than two years||Online savings or money market accounts; cash management accounts||1.5% or more||Low||Low, but significantly better than the average at traditional banks|
|Two to three years||Short-term bond funds or money market mutual funds||2% or more, for those willing to take on more risk||Moderate — can reduce risks by choosing government bond funds||Low-medium, depending on bond or fund risk|
|Three to five years||Bank certificates of deposit (CDs) or peer-to-peer loans||2.5% or more for CDs, 5% or more for peer-to-peer loans||Low for CDs; Moderate for P2P loans (can reduce risks via selection)||Medium-high. The longer the CD term the higher the return. With P2P you’ll be helping fund borrowers|
|When you need the money||Where to put it and |
|Risk vs. reward|
|Less than 2 years||• Online savings or money market account|
• 1.50% or slightly more
|• Low risk
• Low reward, but significantly better than at traditional banks
|2 - 3 years||• Short-term bond funds or money market mutual funds|
• 1% or more
|• Moderate risk
• Low to medium reward
|3 - 5 years||• Peer-to-peer loans|
|• Moderate risk
• Medium reward
|Any time period, for those who have high-interest debt||• Pay off debt|
• Return equals what you would have owed by paying debt off over time
|• Low risk
• High reward if your have high-interest debt
Best investments for money you need in less than 2 years
Online savings account or money market account
Potential interest rate: 1.5% or higher
In NerdWallet’s roundup of the best high-yield savings and money market accounts, we’re seeing annual percentage yields paying more than 1% and many near or above 2%. That doesn’t sound like much until you compare it to 0.10%, the current national average interest rate on savings accounts, according to the Federal Deposit Insurance Corp. — 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.
Cash management account
Potential interest rate: 2% or higher
Another alternative 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.
Wealthfront’s Cash Account charges no fees and is currently paying 2.57% interest. Through agreements with several banks, Wealthfront offers up to $1 million in FDIC coverage. The minimum account balance is $1 with unlimited transfers into and out of the account.
SoFi Money’s 2.25% APY is another option for your short-term investments. There is no minimum balance requirement and depositors pay no monthly account, overdraft, ATM or foreign transaction fees. It also offers peer-to-peer money transfers, free physical checks and FDIC insurance up to $1.5 million.
Best investments for money you need in 2 to 3 years
Short-term bond fund
Potential interest rate: 2% 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 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.
Betterment’s Smart Saver account is one option for savers interested in bond funds. It invests your money into conservative bond funds to produce a high-yield 2.15% interest rate, net of Betterment’s 0.25% account management fee.
Money market mutual fund
Potential interest rate: 2% or more
Another option is money market mutual funds, also known as money market funds. Not to be confused with similarly named money market accounts (above), money market funds are mutual funds that purchase short-term, high-quality debt from the U.S. government, municipalities or corporations. There also can be tax benefits, as some money market funds hold municipal securities that are exempt from federal and state taxes. These funds are not FDIC-insured and carry risks similar to short-term bonds.
You can purchase bond funds or money market funds via an online brokerage account. (Here’s how to open a brokerage account.) Here are NerdWallet’s top picks for the best brokerage accounts:
Best investments for money you need in 3 to 5 years
Bank certificates of deposit (CD)
Potential interest rate: 2.5% or higher
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.
If you need to withdraw your money before the CD term ends, you’ll pay a penalty of between three and six months’ interest. Also note that CDs may have a minimum deposit requirement.
Potential interest rate: 5% or more
On the riskier end of the spectrum are peer-to-peer loans. Online lenders like Prosper and Lending Club are options for investors who are willing to lend money to borrowers who need cash for anything from home renovations to medical expenses.
On both sites, 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 return still is substantially greater than a savings account. Lending Club says historical returns on loans graded A are 4.89%; Prosper’s top credit class, AA, has estimated returns of 4.15%.
To lower risk further, diversify by spreading loans around into small chunks, lending $25 or $50 to each candidate rather than, say, $2,500 to one. Both services say investors who invest in 100 or more loans have close to a 100% chance of seeing positive returns. When a borrower makes a payment, it’s distributed to the loan’s investors, and you can either withdraw or reinvest it. Loan terms start at three years and require minimum investments of $25. Investors also pay a service fee on both platforms, so be sure to note that in your calculations.