Generally, the longer you invest your money, the greater the potential for profit. However, many people—especially those just starting out with investments—need to maintain liquidity to access their money as needed, or not too far off in the future, without painful penalties or fees. The best short-term investments allow you to put your money to work for as little as a year, or even less time.
If you have high-interest debt like credit card debt, it’s smart to pay it off before undertaking short-term investments. You pay more in interest than the return rates of these investments. The only caveat is that you should have some savings in place before paying off debt. This helps you avoid going further into debt while you’re trying to pay it off because one of life’s unexpected expenses comes up—which they invariably do. But you can accomplish this using the first short-term investment on our list below.
The best short-term investments are relatively safe, but investing always carries some risk. And, as mentioned, they aren’t typically as high-yielding as long-term investments; there is a trade-off for liquidity. Consider, though, that if you simply have your money sitting in a checking account, it loses value to inflation over time.
In other words, money you don’t invest has a built-in guaranteed loss, small as it may be. You can certainly lose more faster with investments, but with a cautious approach, taking advantage of the safest and best short-term investments should at the very least keep you from losing money to inflation, and ideally help you grow your money some.
How to Invest Your Money in the Short Term
- High-yield savings accounts – Today, banks pay almost nothing in interest on most savings accounts. But many online banks (and some traditional ones) offer “high-yield” savings accounts that pay interest rates around 2.5 percent. Usually, there’s no minimum deposit or balance required, and you have unrestricted access to you money. Even if you do nothing else, this is an FDIC-insured, no-risk place to put money you don’t need in your checking account where it can earn a small return and at least keep you from losing buying power to inflation. And, as mentioned above, you should always have savings to prevent having to take on debt.
- Money market accounts (MMAs) – MMAs are fairly similar to high-yield savings accounts, but they usually do have a minimum deposit requirement and some restrictions on access to your money each month. That’s the trade-off for slightly higher returns than with a high-yield savings account. MMAs are also FDIC-insured.
- Certificates of deposit (CDs) – Certificates of deposit are usually FDIC-insured as well, and so considered safe. These offer higher potential gains than the previous two entries, but less liquidity because you agree to lock up your money for a certain amount of time, which may be as little as a month, several months, a year, or several years. Again, the longer the investment term, the higher the yield.
- Treasury bills (T-bills) – These are short-term bonds bought from the US Treasury. T-bills are typically sold in $1,000 increments, purchased at a discount, and you receive the full face value at the maturity date, which can be a matter of days, weeks, months, or a year; the longer your wait, the greater your discount. Backed by the US government, these are a safe investment that often edge out the previous entries in terms of their return, though your money is tied up for the term of the investment.
- Short-term bond exchange traded funds (ETFs) – These ETFs put your money into short-term bonds. This investment vehicle has higher risk than the previous entries, but also greater potential gains. Also, because the investments are in short-term bonds, there’s generally less volatility than with lengthier bond investments. So, these can be an attractive compromise between the types of investments previously mentioned and other ETFs that have higher risk and potential yield.