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 money||Where to put it||Potential interest rate||Risk||Reward|
|Less than two years||Online savings or money market accounts||1% or slightly 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||1% or more, for those willing to take on more risk||Moderate — can reduce risks via selection||Low-medium, depending on bond or fund risk|
|Three to five years||Peer-to-peer loans||5%||Moderate — can reduce risks via selection||Medium-high, you’ll be helping fund borrowers|
|Any time period, but you also have high-interest debt||Pay down (or pay off) the debt||Your current debt interest rate||Low||High, given the cuts in interest costs|
|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
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.
at Chase Bank
at Discover Bank
at Ally Bank
Monthly savings fee
*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
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: email@example.com. Twitter: @arioshea. Staff writer Anna-Louise Jackson also contributed to this report. Email: firstname.lastname@example.org. Twitter: @aljax7.