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Less Than 5 Years to Invest? Best Accounts for Short-Term Savings

July 31, 2017
Investing, Investing Strategy, Investments
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Interest rates have inched up in the last couple of years, but they’re still low by historic standards. The low rates that have helped you save money on a mortgage or student loan refinance have a downside: Cash stashed away in safe places — savings accounts, CDs and money market accounts — probably isn’t earning a notable return, particularly if it’s at a traditional bank.

Money you may need within five years generally shouldn’t be invested in the stock market because that time horizon isn’t long enough to recover from a downturn. You should still strive to earn every cent possible. (Skip ahead to see top places for maxing out your savings account rates.) Be wary of long-term CDs, which tie up your money while interest rates are still rising and hit you with an interest penalty if you attempt to withdraw your investment before the end of the term.

Here’s a guide to the best accounts for your money depending on your short-term timeline:

When you need the moneyWhere to put itPotential interest rateRiskReward
Less than two yearsOnline savings or money market accounts1% or slightly moreLowLow, but significantly better than the average at traditional banks
Two to three yearsShort-term bond funds or money market mutual funds1% or more, for those willing to take on more riskModerate — can reduce risks via selectionLow-medium, depending on bond or fund risk
Three to five yearsPeer-to-peer loans5%Moderate — can reduce risks via selectionMedium-high, you’ll be helping fund borrowers
Any time period, but you also have high-interest debtPay down (or pay off) the debtYour current debt interest rateLowHigh, given the cuts in interest costs
When you need the moneyWhere to put it and
potential interest
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
• 5%
• 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

Money you need in less than 2 years

Online savings or money market accounts

Potential interest rate: 1.50% or slightly higher

Seek out the banks and credit unions that pay top interest rates. NerdWallet has rounded up the best high-yield savings and money market accounts — with annual percentage yields near 2%. That doesn’t sound like much until you compare it to 0.08%, 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.

See how interest rates and fees at a national bank compare to those at two online banks below.


NerdWallet bank rating

Learn more
at Chase Bank


NerdWallet bank rating


at Discover Bank

NerdWallet bank rating


at Ally Bank

Savings APY

0.01%*





Monthly fee

$5





Bonus features

Sign-up bonus for new customers
(Expires 10/15/2018)


Savings APY

1.80%





Monthly fee

$0





Bonus features

Solid CD options



Savings APY

1.85%





Monthly fee

$0





Bonus features

24/7 customer service



Compare high-yield savings accounts
*Effective 6/15/18; rates are variable and subject to change

Money you need in 2 to 3 years

Short-term bond funds or money market mutual funds

Potential interest rate: 1% or more, for those willing to take on more risk.

Bonds allow you to lend money to a company or government, which then pays you back with interest. They’re not risk-free: 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.

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.

» Ready to get started? Find the best brokerage account

Money you need in 3 to 5 years

Peer-to-peer loans

Potential interest rate: 5% or more

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.

If you have high-interest-rate debt

Pay down or pay off debt

Potential interest rate: Your current debt interest rate

Want to earn double-digit returns on your investment? Pay off high-interest-rate debt.

When you pay off high-interest credit card debt, personal loans or other expensive debt, the return is equal to the interest rate you would’ve otherwise owed by paying that debt off slowly over time. If you can wipe out a $2,000 credit card balance at a 13% interest rate, you’ll save around $900 in interest and five or six years of minimum monthly payments.  Best of all, directing your short-term cash toward this debt gives you a guaranteed rate of return.

This is why many financial advisors suggest people who have substantial savings and credit card debt use at least a portion of that savings to pay it down.

» Have stacks of credit-card bills? Consider your best debt options

More on building your savings from NerdWallet:

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea. Staff writer Anna-Louise Jackson also contributed to this report. Email: ajackson@nerdwallet.com. Twitter: @aljax7.