Short-term investments are financial vehicles designed to grow your money over one to five years while keeping your funds relatively accessible. These investment options offer better returns than traditional savings accounts without the long-term commitment or volatility of the stock market.
What Makes a Good Short-Term Investment?
A solid short-term investment should prioritize accessibility, safety, and reasonable returns for money you plan to use in the near future. Unlike long-term investments, where maximizing growth is the goal, short-term options focus on preserving capital while providing better earnings than a standard savings account.
Liquidity is crucial because you may need access to your funds at any moment. The best short-term investments allow for easy withdrawals without significant penalties or loss of principal. This ensures that if an unexpected expense arises, your money will be available when you need it.
Low volatility is another key factor. Unlike stocks or other high-risk investments, good short-term investments should keep your principal stable, ensuring your money will be there when you need it. This is particularly important for major life goals like home purchases or emergency savings.
Lastly, look for options that outpace traditional savings accounts. Remember that inflation can erode your purchasing power over time, even in the short term. While no short-term investment completely eliminates this risk, the best options help mitigate its effects by offering modest returns.
Let’s look at the different types of short-term investments.
1. High-Yield Savings Accounts (Safest Option)
High-yield savings accounts function just like traditional savings accounts but with significantly higher interest rates—often 10 to 20 times the national average. These accounts are typically offered by online banks, which have lower overhead costs and can pass those savings to customers in the form of better rates.
Most high-yield savings accounts are FDIC-insured up to $250,000 per depositor, making them one of the safest places to store short-term funds. Unlike investments tied to the stock market, your principal is protected even if the bank fails.
One of the biggest advantages of high-yield savings accounts is their liquidity. You can access your money at any time without penalties, making them ideal for emergency funds or savings goals within the next 12 to 24 months. Some accounts have transaction limits, but they generally provide flexible access to your funds.
Interest rates on these accounts fluctuate based on the broader economy. When the Federal Reserve raises interest rates, high-yield savings accounts follow suit, unlike fixed-rate investments such as certificates of deposit (CDs).
How they compare to traditional savings accounts
High-yield savings accounts offer plenty of advantages over traditional accounts:
- Interest rates: High-yield savings accounts typically offer rates between 3% and 5%, whereas traditional banks offer as little as 0.01% to 0.25%.
- Monthly fees: Many traditional banks charge maintenance fees between $5 and $25 per month unless you meet certain balance requirements. Most high-yield savings accounts have no fees.
- Branch access: High-yield savings accounts are usually offered by online banks with no physical branches, keeping costs low and passing these savings to customers.
- Bundled services: Traditional banks often bundle checking and savings accounts for convenience, while high-yield accounts may require maintaining relationships with multiple financial institutions.
Finding the best offers
Currently, top high-yield savings accounts offer APYs between 4.0% and 5.25%, though these rates change frequently. Websites like Bankrate, NerdWallet, and Deposit Accounts provide real-time rate comparisons and customer reviews that can help you find the best option.
Credit unions sometimes offer competitive rates, especially if you qualify for membership through your employment, location, or other affiliations. Some banks also offer promotional rates that are temporarily higher to attract new customers—just be sure to check what the rate will be after the promotional period ends.
When high-yield savings accounts are ideal
Here are the types of funds you should put into high-yield savings accounts:
- Emergency funds: These accounts provide immediate access to cash while earning better interest than a traditional savings account, making them perfect for your emergency fund.
- Savings for short-term goals: High-yield savings accounts are also perfect when you’re saving for vacations, weddings, or holiday shopping, where liquidity is more important than maximizing returns.
- Down payment savings: If you’re saving to buy a home or car within the next few years, a high-yield savings account can help grow your money without risk. Even a 1–2% higher interest rate can add thousands to your down payment fund over time.
- Tax payments: Self-employed individuals or those with additional tax liabilities can park funds in these accounts, earning interest until the money is needed.
2. Certificates of Deposit (Time-Locked Growth)
Certificates of deposit (CDs) require you to commit your money for a specific term—ranging from three months to five years—in exchange for a guaranteed fixed interest rate. Longer-term CDs generally offer higher rates, rewarding you for keeping your money locked in.
The trade-off with CDs is early withdrawal penalties, which typically range from 60 days to a full year of interest, depending on the term and institution. Because of this, CDs are best suited for funds you know you won’t need until a specific date. They usually outperform savings accounts if you can commit to the full term.
CD terms and rates
There are three different kinds of CD terms and rates:
- Short-term CDs (3–12 months): Currently offer APYs between 4.00% and 5.50%, slightly higher than most high-yield savings accounts.
- Medium-term CDs (1–3 years): APYs range from 4.25% to 5.75%, providing better returns for those willing to lock in funds for longer.
- No-penalty CDs: These allow withdrawals after an initial period without fees, offering rates that fall between those of regular savings accounts and standard CDs.
Online banks and credit unions often provide better CD rates than traditional banks, sometimes exceeding 1–2% more for the same term.
CD laddering: a strategy for better returns and flexibility
CD laddering involves splitting your investment across multiple CDs with staggered maturity dates instead of locking everything into a single CD.
For example, if you want to invest $10,000, you might place $2,500 each into 3-month, 6-month, 9-month, and 12-month CDs. As each CD matures, you can either use the funds or reinvest into a new long-term CD, maintaining continuous access to portions of your money while still earning competitive rates.
This strategy is particularly useful in rising interest rate environments. As CDs mature, you can reinvest at higher rates rather than being locked into a lower rate for an extended period.
When CDs make more sense than savings accounts
There are a few occasions when locking your money in makes the most sense:
- Falling interest rate environment: If rates are expected to drop, locking in today’s higher rates ensures you don’t miss out on additional gains.
- Fixed financial goals: If you have a set timeline, such as buying a home in 18 months, a CD can help you stay disciplined and earn better returns than other options.
- Needing to avoid temptation: If you’re prone to dipping into savings, CDs provide a psychological barrier that discourages early withdrawals.
- Rate gaps: When the gap between CD and high-yield savings rates exceeds 0.5%–1.0%, CDs can justify the reduced liquidity, especially for larger deposits.
3. Money Market Accounts (Flexible Access with Better Returns)
Money market accounts (MMAs) combine features of both checking and savings accounts, offering higher interest rates than standard savings accounts while also providing check-writing privileges and debit card access. This hybrid nature makes them particularly useful for short-term investors seeking both returns and accessibility.
Like savings accounts, MMAs are typically FDIC-insured up to $250,000 at banks and NCUA-insured at credit unions, providing a high level of security. Their interest rates are variable and often tiered, meaning higher balances earn better returns. Competitive MMA rates currently range between 3.75% and 5.00% APY, positioning them between high-yield savings accounts and short-term CDs.
Differences from high-yield savings accounts
While both options offer strong returns compared to traditional savings accounts, MMAs differ in several ways:
- MMAs provide check-writing abilities and debit card access, making them more versatile for frequent transactions. High-yield savings accounts generally have stricter withdrawal limits.
- Minimum balance requirements for MMAs tend to be higher, often starting at $1,000-$2,500, whereas high-yield savings accounts often have no minimums or much lower requirements.
- While MMAs sometimes offer slightly better rates than standard savings accounts from the same institution, high-yield accounts from online banks frequently match or exceed MMA rates.
- Interest calculation methods can be more complex with MMAs, using tiered structures where different balance portions earn different rates.
4. Short-Term Bond Funds (Modest Growth Potential)
Short-term bond funds invest in fixed-income securities with maturities ranging from one to three years. This means they can offer better potential returns than savings products while maintaining moderate volatility. Short-term bond funds provide diversification by holding a mix of bonds rather than a single security, reducing individual credit risk.
Unlike individual bonds that must be held to maturity for full returns, bond funds can be bought or sold on any business day. This makes them more liquid but also exposes them to fluctuations in value as interest rates change. Expense ratios for short-term bond funds typically range from 0.05% to 0.50% annually, which slightly reduces overall returns.
Government vs. corporate short-term bonds
There are four different kinds of short-term bond funds:
- Government bond funds invest primarily in U.S. Treasury securities and other government-backed debt, offering maximum safety but lower yields.
- Corporate bond funds hold debt issued by companies with varying credit ratings. Investment-grade corporate bond funds provide a balance of yield and safety.
- Municipal bond funds invest in state and local government debt, often offering tax-free interest income, which can be beneficial for investors in higher tax brackets.
- Mixed-approach funds combine government and corporate bonds to balance safety and returns, often achieving better risk-adjusted performance.
Bond fund advantages over individual bonds
With a bond fund, professional management handles bond selection and monitoring, so investors don’t need to analyze individual securities. These funds also provide diversification across dozens or even hundreds of bonds, reducing the risk of any single bond defaulting.
Lower investment minimums, typically ranging from $1,000 to $3,000, make bond funds easier to enter than individual bonds, which often require $1,000 to $5,000 per bond. Additionally, bond funds offer greater liquidity, allowing investors to sell shares at the current market price without the challenges of finding buyers for individual bonds.
5. Treasury Securities (Government-Backed Options)
Treasury securities are debt instruments issued by the U.S. government, making them some of the safest investments available. Since they are backed by the full faith and credit of the U.S. government, they carry virtually no default risk and are widely considered the benchmark for risk-free returns.
Interest earned on Treasury securities is exempt from state and local income taxes, offering additional benefits for investors in high-tax states. Investors can purchase them directly through TreasuryDirect.gov, avoiding brokerage fees and commissions. Their secondary market is highly liquid, allowing for efficient sales before maturity if needed.
Treasury Bills (T-Bills) (for timeframes of one year or less)
T-Bills are short-term securities with maturities ranging from four to 52 weeks. Instead of paying periodic interest, they are sold at a discount; the difference between the purchase price and face value then represents the investor’s return.
Current T-Bill yields range from 4.00% to 4.30%, often outpacing savings accounts while maintaining exceptional safety. These rates fluctuate based on Federal Reserve policy and market conditions. Investors can purchase T-Bills in increments as low as $100 through TreasuryDirect.gov, though larger purchases typically follow standard $1,000 denominations.
Weekly auctions determine T-Bill yields, with results published on the Treasury website. Individual investors typically place non-competitive bids, ensuring they receive the average auction rate.
Treasury Notes (for investments of one to five years)
Treasury Notes have maturities of two, three, five, seven, and ten years, with the two- to five-year range aligning well with short-term investment horizons. Unlike T-Bills, Notes pay fixed interest every six months in addition to returning the principal at maturity.
Current yields for two- to five-year Treasury Notes range from 4.00% to 4.60%. These rates closely track with Federal Reserve policy and broader economic conditions. However, longer maturities introduce interest rate risk—if sold before maturity, the principal value may fluctuate based on prevailing interest rates at the time of sale.
Both Treasury Bills and Notes offer an attractive balance between safety and yield, making them a strong option for investors seeking government-backed security without locking up funds in CDs or exposing themselves to market volatility.
6. Roth IRA Contributions (Dual-Purpose Strategy)
Roth IRA contributions offer a unique dual-purpose strategy, allowing investors to withdraw their original contributions at any time without taxes or penalties. Unlike earnings, which must remain invested until retirement to avoid penalties, this flexibility makes Roth IRAs a useful short-term savings tool while still growing tax-free wealth for retirement.
How Roth IRAs can work for short-term goals
The ability to withdraw contributions at any time without being taxed or penalized creates a built-in financial safety net for emergencies or unexpected opportunities. Investors who want to keep their short-term funds in a Roth IRA while minimizing risk can opt for conservative investments such as money market funds, short-term bond funds, or CDs. Meanwhile, the portion earmarked for long-term retirement growth remains invested in higher-yield assets.
For those saving for their first home, a Roth IRA offers additional flexibility, allowing up to $10,000 in earnings (beyond contributions) to be withdrawn without penalty after five years—a significant advantage for those working toward a down payment.
Similarly, Roth IRAs can help fund education expenses, as qualified withdrawals of earnings avoid penalties. While retirement savings should be the primary focus, the ability to access funds in a pinch gives Roth IRAs a practical, multi-purpose appeal.
7. Cash Management Accounts (the Hybrid Solution)
Cash management accounts (CMAs) serve as a hybrid between traditional banking and investing, offering features designed for those who want seamless access to both. Typically provided by brokerage firms like Fidelity, Charles Schwab, and Betterment, CMAs act as a central hub for cash while allowing easy movement between investments and spending.
Unlike standard bank accounts, CMAs often provide FDIC insurance beyond the usual $250,000 limit by sweeping deposits into multiple partner banks. This added security makes them particularly attractive to individuals or businesses holding substantial cash balances.
Brokerage cash management features and benefits
CMAs come with a few advantageous features:
- ATM fee reimbursements: Many CMAs reimburse ATM fees, allowing worldwide cash access without extra charges.
- No minimums or monthly fees: Unlike traditional bank accounts, CMAs often waive minimum balance requirements and maintenance fees.
- Automated sweeps: Surplus cash is automatically transferred into higher-yielding options while maintaining liquidity for daily needs.
- Simplified financial management: Integrated accounts consolidate tax reporting and investment tracking.
Higher yields with banking conveniences
One of the most glamorous features of CMAs is their ability to offer competitive interest rates on cash balances, often exceeding traditional accounts and, in some cases, matching high-yield savings accounts.
Current CMA yields range from 2.20% to 4.75%, depending on the provider, with some offering tiered rate structures that reward higher balances with better returns. Again, this setup is especially advantageous for individuals or businesses managing large cash reserves.
Unlike CDs, which require locking in funds for a set period to achieve competitive rates, CMAs provide both high yields and complete liquidity, making them a strong choice for those who want to earn more on idle cash while keeping it easily accessible. Additionally, integration with robo-advisors allows for automated cash management based on an investor’s goals and timeline, creating an efficient bridge between savings and investments.
8. Peer-to-Peer Lending (Higher Risk, Higher Reward)
Peer-to-peer (P2P) lending connects investors with borrowers directly, bypassing traditional banks. Platforms like Prosper, LendingClub, and Upstart offer expected returns of 6% to 12%, far higher than most short-term investments—but with increased risk. These loans are typically unsecured and are not FDIC-insured, so careful risk management is key. Minimum investments range from $25 to $1,000, with options to spread funds across multiple loans for diversification.
How P2P lending platforms work
P2P lending platforms use algorithms to assess borrowers, assigning risk-based ratings based on credit scores, income verification, debt-to-income ratios, and other financial factors. Investors can then browse loan listings that include anonymized borrower details such as loan purpose, requested amount, interest rate, and repayment term. Many platforms also provide filtering tools, allowing investors to select loans based on specific criteria such as credit score range or intended use.
For those preferring a hands-off approach, automated investing tools allow capital to be deployed into matching loans based on pre-set parameters. Once invested, borrowers make monthly payments that include both principal and interest, providing investors with a steady cash flow. These payments can either be withdrawn or reinvested into new loans, creating a compounding effect that enhances returns over time.
Managing risk when choosing borrowers
Diversification is key when investing in P2P lending, as concentrating funds into just a few loans can significantly increase exposure to defaults. Most platforms recommend spreading investments across dozens or even hundreds of loans to manage this risk. Borrowers are assigned risk grades—typically ranging from A to G—indicating their creditworthiness.
Higher-grade loans provide more security but offer lower returns, while lower-grade loans carry higher default risk in exchange for greater potential earnings. The purpose of a loan can also serve as an indicator of repayment likelihood, with debt consolidation and credit card refinancing historically performing more reliably than business or major purchase loans.
Some platforms offer secondary markets, allowing investors to sell loans before they reach full maturity. However, liquidity in these markets is not always guaranteed, and selling at a discount may be necessary depending on the loan’s payment history and remaining term.
Expected returns and liquidity considerations
Historical net returns for conservative P2P lending portfolios typically range from 3% to 8% after defaults and fees, while more aggressive strategies may see returns of 7% to 15%. However, these numbers can shift significantly during economic downturns, when default rates rise.
Platform fees—such as servicing fees (generally 1% to 2% of outstanding loan balances) and collection fees on late payments—further impact net returns. Compared to other short-term investments, liquidity is more limited, as most loans have terms of three to five years.
While some platforms provide secondary markets for selling loans early, access to funds is not as immediate as traditional banking products. Additionally, tax treatment is less favorable, with interest income taxed as ordinary income rather than benefiting from lower capital gains rates or tax-exempt status.
The Right Mix: Creating a Short-Term Investment Strategy
Taking a layered approach allows you to balance liquidity and returns. Emergency funds go in high-yield savings, while goals for the next one to three years may benefit from CDs or Treasuries. Riskier assets should be reserved for flexible goals. Remember to regularly reassess your investments to ensure you’re maximizing returns.
Match investments to specific goals and timelines
Use this quick list to see which type of investment you should consider based on your end goal:
- Emergency fund (3–6 months of expenses) → High-yield savings or cash management accounts for easy access
- House down payment (1–3 years) → CD ladder or Treasury securities to lock in returns without market risk
- Wedding/vacation (6–12 months) → No-penalty CDs or high-yield savings for flexibility
- Car purchase (18–24 months) → Short-term CDs & Treasury Bills for a mix of liquidity and yield.
- Home renovation (2–3 years) → Treasury Notes & short-term bond funds for a slight return boost
Diversify across multiple short-term options
Spreading short-term investments across different account types helps mitigate institutional risk while maximizing returns. A mix of high-yield savings accounts, Treasury securities, and short-term bond funds provides a well-rounded approach, ensuring both liquidity and growth.
However, chasing the highest available interest rates requires careful evaluation. Constantly moving money for slight rate advantages can be counterproductive when considering the time and effort involved, along with potential delays in fund availability. In some cases, relationship benefits—such as waived banking fees or preferential mortgage rates—may justify keeping funds in slightly lower-yield accounts. The goal should always be to strike a balance between maximizing returns and maintaining financial efficiency.
Common Mistakes to Avoid with Short-Term Investing
Small missteps can quietly erode your returns and limit the effectiveness of your short-term investments.
Chasing yields and ignoring risks
A common pitfall in short-term investing is chasing high yields without fully understanding the associated risks. Investors often focus on the highest advertised rate, only to realize later that restrictions, fees, or other risk factors are significantly diminishing their real returns.
Teaser rates that drop after a promotional period or investments with high default rates can be misleading. Similarly, prolonged periods of economic stability can cause investors to forget that higher returns always come with increased risk exposure.
Hidden fees and penalties—whether from maintenance charges, early withdrawal penalties, or account tier structures—can further erode returns if not carefully accounted for.
Forgetting about inflation’s impact
While nominal yields might look attractive, real returns after adjusting for inflation determine actual purchasing power. If inflation is at 3% and an investment yields 4%, the real return is only 1%.
Inflation can also vary across expense categories, with costs for education, healthcare, and housing sometimes rising faster than general inflation measures like the Consumer Price Index. Ignoring these factors can lead to false confidence in investment performance.
Overlooking fees and penalties
Account maintenance fees can wipe out interest earnings on smaller balances, effectively turning a high-yield account into a low-return investment. Some institutions have balance tier breakpoints, where dropping below a certain amount significantly reduces the earned rate.
Minimum balance requirements can also create opportunity costs; if you keep your money idle just to avoid fees, you’re missing the opportunity of putting it to better use elsewhere. Additionally, early withdrawal penalties on CDs or other time-restricted investments can be severe, sometimes exceeding years’ worth of interest if an account is broken prematurely.
Can You Build Your Rich Life with Short-Term Investments?
Your Rich Life is about spending extravagantly on what you love while cutting costs on things you don’t care as much about. Short-term investments create the financial foundation that makes this possible by giving you funds for meaningful experiences without sacrificing long-term security or relying on high-interest debt.
By strategically allocating funds to different investment vehicles, you can create a system that allows for meaningful experiences without sacrificing long-term security. Smart short-term investing gives you confidence in your financial decisions, reduces stress about upcoming expenses, and allows you to enjoy the present without relying on high-interest debt. The key is aligning your investments with your unique goals and timelines so that your money is available when you need it—not just locked away for the distant future.
Learn more about how to take control of your finances and build your Rich Life through my NYT Bestselling Book, I Will Teach You To Be Rich.