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Best Short-Term Investment Accounts for Money You Need in 5 Years or Less

A side-by-side comparison of online savings and money market accounts, cash management accounts, short-term bond funds, money market mutual funds and peer-to-peer loans.
Aug. 11, 2019
Investing, Investing Strategy, Investments
650066898
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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 moneyWhere to put itPotential interest rateRiskReward
Less than two yearsOnline savings or money market accounts; cash management accounts1.5% or moreLowLow, but significantly better than the average at traditional banks
Two to three yearsShort-term bond funds or money market mutual funds2% or more, for those willing to take on more riskModerate — can reduce risks by choosing government bond fundsLow-medium, depending on bond or fund risk
Three to five yearsBank certificates of deposit (CDs) or peer-to-peer loans2.5% or more for CDs, 5% or more for peer-to-peer loansLow 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 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

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 0.09%, 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.

Consider these short-term investment options for money you need in two years or less:

Goldman Sachs Bank USA

at Goldman Sachs Bank USA,

Member, FDIC

NerdWallet bank rating:
4.0 NerdWallet rating
NerdWallet bank rating:
4.0 NerdWallet rating
Discover

at Discover,

Member, FDIC

NerdWallet bank rating:
4.5 NerdWallet rating

APY

2.00%





Monthly fees

$0





Bonus features

Excellent CD options



APY

2.15%





Monthly fees

$0





Bonus features

Large ATM network



APY

1.90%





Monthly fees

$0





Bonus features

Solid CD options



See more high-yield savings accounts

Cash management account

Potential interest rate: 2% or higher

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.

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 for short-term savings, 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 if you’re 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 short-term, higher yield savings 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:

Trade Fee

$6.95

$6.95

Account Minimum

$500

$500

Promotion

Up to $600

Up to $600

cash credit with a qualifying deposit

Trade Fee

$6.95

$6.95

Account Minimum

$0

$0

Promotion

300

300

$0 online stock and ETF trades, no minimum deposit required

Trade Fee

$4.95

$4.95

Account Minimum

$0

$0

Promotion

90

90

days of commission-free trades, up to $500 in value

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.

» Shop the best CD rates right now

Peer-to-peer loans

Potential interest rate: 5% or more

On the riskier end of the short-term investment 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.

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