“I have a little cash in my bank account, and I’ll need to access it in under a year. Where can I invest it short-term for a better return than my checking account?”
I hear this question all the time. And the good news is that short-term investors have more options today than ever before. While often — but not inherently — lower-risk, short-term investments typically yield lower returns than long-term investments.
Many of the options below are so safe, they’re guaranteed by the federal government. Others offer returns rivaling even long-term investments but come with an extra serving of risk as well. At the very least, you should be able to avoid losing money to inflation with little or no risk.
Here’s what all investors need to know about short-term investing before they park their money for under a year.
What Are Short-Term Investments?
Most investors consider “short-term” to mean under one year. That means you can expect the IRS to tax the returns at your regular income tax rate, whether those returns come in the form of interest, dividends, or short-term capital gains.
When I park money in short-term investments, I expect to get both my invested capital and returns back within 12 months. No muss, no fuss, no long-term commitment, just cash in hand and out the door.
What to Look for in a Short-Term Investment
Over a long enough time horizon, you can wait out the ups and downs of the stock market’s gyrations. Your priority is simple: Earn the highest return possible.
But when you’re bound by a short time frame, other needs often trump returns.
- Low Risk. If you might need the money soon for another purpose, you can’t stomach much risk. For example, if you’re house hunting and making offers, you shouldn’t put your down payment in high-risk, speculative investments like cryptocurrencies.
- Liquidity. How quickly will you need to access your money? All deposit accounts let you access your money immediately, although some charge a penalty for early withdrawal. And some investments are easier to liquidate into cold, hard cash than others.
- Stability. When you need to pull your cash back within the next six to 12 months, you can’t wait out a stock market correction. That means you should avoid volatile investments that are subject to quick, violent swings in value.
- Low Transaction Costs. The more frequently you move money in and out of an investment, the faster transaction costs add up. For example, rental properties come with enormous closing costs both when you buy and when you sell. The longer you hold onto the investment, the less these costs impact your total returns — which is why people buy and hold properties for years or decades.
- Hedge Against Inflation. If you weren’t worried about losing money to inflation, you’d just leave your cash in your checking account. But ultimately, every dollar you leave in cash loses value each year. Investing money always involves some degree of risk, no matter how small. But when you fail to invest, you don’t risk loss; you guarantee it.
Best Short-Term Investments
So what are some relatively safe places to park your money if you need it back within a year, without losing value to inflation? Here are 10 short-term investment options, in ascending order of risk.
1. High-Yield Savings
Best for safety and liquidity
- Pros: No risk (guaranteed by the FDIC), instant liquidity
- Cons: Relatively low interest
- Potential Interest Rate: 0.3% to 1.5%
Savings accounts, including online and automated savings accounts, are insured by the federal government through the Federal Deposit Insurance Corporation (FDIC). Your first $250,000 is guaranteed secure.
Many banks pay nothing or almost nothing on savings account balances, but some high-yield savings accounts offer annual percentage yields (APYs) as high as 2.5%. That may not be much compared with stock or real estate returns, but it’s pretty impressive for a guaranteed secure account with no risk.
Check out the high-interest savings account from CIT Bank as an example; they also offer CD account options and a savings builder account that offers an even higher interest rate if you prefer (more on CDs shortly).
2. Money Market Accounts (MMAs)
Best alternative to savings accounts
- Pros: No risk (guaranteed by the FDIC), decent liquidity, perhaps higher interest than savings accounts
- Cons: Minimum deposit, withdrawal restrictions, low interest rate
- Potential Interest Rate: 0.3% to 1.5%
A money market account (MMA) is similar to a high-yield savings account, but most require a minimum deposit and restrict withdrawals each month. Withdrawals can be limited based on the number of transactions, a specific dollar amount, or both.
That means they don’t offer the perfect liquidity of a savings or checking account. However, they remain more flexible and liquid than a CD.
If you’re a student or recent graduate new to investing and wary of any risk, money market accounts can be a safe way to start investing. Most money market accounts are insured by the FDIC, and some even offer the convenience of checks. Even so, they typically pay similar interest as high-yield savings accounts, but with more restrictions.
For examples of banks offering secure MMAs with strong yields, try CIT Bank, TIAA Bank, and Ally Bank. You can often find better interest rates at online banks over brick and mortar banks, given their lower operating costs.
3. Certificates of Deposit (CDs)
Best for predictable withdrawals in higher-interest environments
- Pros: No risk (guaranteed by the FDIC)
- Cons: Restrictive liquidity, low interest rates
- Potential Interest Rate: 0.3% to 1.5%
Like savings accounts and money market accounts, most CD accounts are FDIC-insured and therefore extremely safe.
But unlike the other two, banks place strict limits on early withdrawals from CDs. When you deposit money in a CD account, you agree to leave it there for a certain period; it could be a matter of months or even years. The longer the maturity period, the higher the interest.
At the end of that maturity period, the bank releases your funds plus the agreed-upon interest. So if you know you only need to park your money for six months or a year, you can choose the length of maturity that best suits your needs, with full assurance that you’ll get your money back upon maturity.
Of course, life isn’t always predictable. If an emergency arises and you need to pull your money out early, expect the bank to hit you with stiff penalties. In other words, don’t put your emergency fund in a CD.
In low-interest environments, CDs don’t generally pay any better than savings accounts. Price them against savings accounts, and stick with the latter if the interest rate is similar.
4. Treasury Bills (T-Bills)
Best as a short-term bond with virtually no risk
- Pros: No risk (backed by the U.S. Treasury)
- Cons: Low interest, risk of slipping in value if interest rates rise
- Potential Interest Rate: 0.1%+
Treasury bills (T-Bills) are short-term bonds sold by the U.S. Treasury with maturity periods ranging from a few days up to a year. The longer the maturity period, the higher the interest, just like CDs.
When you buy T-Bills, you buy them at a discount from their face value. For example, if a T-Bill’s face value paid upon maturity is $1,000, you might buy it for $975, and then the Treasury pays you $1,000 for it when it matures.
You can buy T-Bills directly from the Treasury or on the secondary market through a brokerage account like Ally Invest. When they’re initially issued, the Treasury typically sells them in increments of $1,000.
Because they’re backed by the U.S. government, T-Bills are among the safest investments you can make. That said, they’re also among the lowest-paying. But they still often beat savings accounts, money market accounts, and CDs.
5. Treasury Inflation Protected Securities (TIPS)
Best for hedging against inflation with no risk
- Pros: No risk (backed by the U.S. Treasury), inflation protected
- Cons: Low interest rates, risk of slipping in value if interest rates rise
- Potential Interest Rate: 0.1%+, plus value adjustment based on inflation
If your primary goal is not to lose money to inflation, then Treasury inflation-protected securities (TIPS) are for you.
These U.S. Treasury bonds offer higher or lower returns based on the pace of inflation as measured by the consumer price index (CPI). When inflation increases, TIPS pay more, and when it decreases, they pay less.
Like the other options above, TIPS don’t pay particularly well, but you can at least protect your cash from losses to inflation. And while they originally sell for five-, 10-, or 30-year terms, you can buy and sell them on the secondary market at any time, making them more liquid than a CD.
You can also invest in exchange-traded funds (ETFs) that own TIPS if you prefer that to direct bond ownership.
6. Short-Term Bond ETFs
Best for easy bond investing
- Pros: Easy trading, dividend yield, lower risk than other ETFs
- Cons: Low returns, some risk
- Potential Return: 0.5% to 3.5%
Actively managed short-term bond funds are exchange traded funds (ETFs) that invest in — you guessed it — short-term bonds.
The bond market introduces some volatility to your investment holdings, which adds risk for short-term investors looking to cash out in under a year. But because these ETFs only invest in short-term bonds, that volatility is limited.
As ETFs go, these funds tend to be low-risk, low-return investments designed to be safer and more stable than typical bond funds. And since ETFs are traded through a brokerage account like TD Ameritrade, you can sell them at any time to liquidate and access your money.
7. Municipal Bonds
Best for tax advantaged bond investing
- Pros: Tax advantages, better returns than Treasury bonds and bank accounts
- Cons: Risk of slipping in value if interest rates rise
- Potential Interest Rate: 2% to 6%
Investors pay no federal income taxes on interest earned on municipal bonds. In most states and cities, you also avoid paying state and local taxes on interest as well.
While a city government is more likely to default than the federal government, the vast majority of city governments are good for the money you lend them. The risk is slightly higher for municipal bonds than Treasury bonds, but the yields are higher too.
This greater risk comes from interest rate fluctuations, rather than bond defaults. If interest rates rise and you need to sell before the bond matures, your bond will be worth less on the secondary market. But no one says you have to buy long-term municipal bonds. You can buy municipal bonds scheduled to reach maturity within a year if you’re worried about fluctuations in interest rates affecting your returns.
8. Arbitrage Funds
Best for investing in stocks while hedging against market volatility
- Pros: Lower risk than most stock funds, potentially higher returns than bonds or bank accounts
- Cons: High expense ratios, unpredictable returns
- Potential Return: 0% to 6%
An arbitrage fund takes advantage of small differences in price, whether between shares of a company on two different stock exchanges or between the current cash price of a stock and its futures contract value.
The fund executes the purchase and the sale simultaneously, dropping the risk far below that of a typical stock fund.
For example, say a company trades on both the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). On the NYSE, its stock is selling for $30.15 per share, but on the LSE, it’s selling at $30.30 per share. The fund buys shares at $30.15 apiece in bulk and simultaneously sells the same number of shares at $30.30 apiece, pocketing the difference.
One unique advantage of arbitrage funds is that they’re one of the few types of funds that perform better when markets see high volatility. More volatility usually means higher risk for stock investors, but not for arbitrage funds. During periods of low volatility, arbitrage funds tend to invest more in debt, a more stable investment.
If you want to invest in the stock market short-term and have a little risk tolerance, arbitrage funds are a great way to reduce risk in your stock portfolio. Just keep an eye on their expense ratios, which can be higher than most mutual funds or ETFs.
9. Corporate Bonds
Best for diversifying risk while investing for higher returns
- Pros: Diversified risk, higher returns
- Cons: Higher risk than other bonds and interest rates
- Potential Interest Rate: 2% to 10%
Corporate bonds come in a full spectrum of risk, so investor beware. Bonds from blue chip corporations that have been around since before your grandparents were born can make for stable, low-risk investment options. On the other end of the spectrum are fly-by-night companies that were born yesterday and may not see tomorrow.
Like government bonds, corporate bonds are loans with a fixed maturity date that are issued to corporations rather than governments. That raises the risk but also the potential returns. And like other bonds, you can buy and sell them on the secondary market. Remember, if interest rates rise, the value of existing lower-interest bonds goes down on the secondary market.
Read up on the basics of corporate and municipal bonds for more details.
For the best short-term investments among corporate bonds, look for established, reputable blue chip brands with household names. You can take risks elsewhere, but among your short-term investments, only invest in the most stable corporate bonds.
10. Peer-to-Peer and Crowdfunding Loans
Best for high returns
- Pros: Higher returns than most other short-term investments, customizable risk
- Cons: Dual risk (default and delay), lack of liquidity
- Potential Interest Rate: 4% to 14%
To be clear, that’s also what happens when you deposit money in a bank account. The difference is that with a bank account, your money is insured by the FDIC, and you receive no or low interest on it. With a crowdfunding or peer-to-peer loan, you take on the risk of the borrower defaulting, but you earn a much higher rate of return if they pay as agreed.
Crowdfunding and peer-to-peer loans are short-term, typically anywhere from six months to five years.
Each investing platform is different, so vet them thoroughly before investing. For peer-to-peer loans, start by researching Prosper and LendingClub. If you’re interested in lending against real estate, try the crowdfunding website Groundfloor, where you can make short-term loans secured by real property paying between 6% and 14% returns. You can also invest in other businesses through Worthy Bonds. They offer a 5% return on all investments.
I personally invest in loans secured by real estate through Groundfloor, and have had largely positive experiences. But beware: once invested, you can’t access your lent money until the borrower pays it back in full. That means short-term investors face both the risk of default and also the risk of late repayment.
For real estate loans such as Groundfloor makes, the risk of default is tempered by a lien against the collateral property. So even if the borrower defaults, Groundfloor forecloses and eventually recovers most or all of your capital. But that could take an extra year, which poses a problem for investors counting on getting their money back in a short period of time.
When you invest money for the short term, keep a close eye on your risk tolerance. Everyone’s financial needs and risk tolerance are unique.
Bear in mind that “short-term” doesn’t inherently mean “low-return” or even “low-risk.” The last thing you want to do is gamble the money held for your tenant’s security deposit, your child’s college tuition, or any other bill with a looming delivery deadline. Aim for the best investment return you can get without putting imminently needed funds in danger.