Short-term investments are a practical option for those saving for near-term goals, offering accessible ways to grow money while minimizing risk. These investments balance the need for liquidity with the opportunity to earn returns, making them suitable for goals within five years.
What Are Short-Term Investments?
Short-term investments refer to financial products that can be easily converted to cash, such as high-yield savings accounts, money market accounts, or short-term bonds. Unlike long-term investments, these are designed for short time horizons and offer relatively low risk. While the returns may be modest, they provide a safer alternative to riskier options like stocks.
Top Short-Term Investment Options by Timeframe
Less than 2 Years
- Online Savings Accounts or Money Market Accounts
- Potential Return: 4% to 5% annual interest.
- Risk: Low. These accounts are FDIC-insured up to $250,000 per depositor, per institution.
Savings and money market accounts are excellent for short-term goals due to their liquidity and security. Current annual percentage yields (APYs) range between 4% and 5%, which is significantly higher than the national average of 0.42% offered by traditional banks.
2 to 3 Years
- Short-Term Bond Funds
- Potential Return: 4% or more for U.S. government bond funds, with potentially higher returns for riskier bonds.
- Risk: Medium.
Short-term bond funds provide moderate returns while maintaining manageable risk levels. These funds typically focus on bonds with shorter maturities, ensuring less volatility than long-term bonds.
3 to 5 Years
- Certificates of Deposit (CDs)
- Potential Return: Around 3% to 4%.
- Risk: Low. CDs offer guaranteed returns if held to maturity.
Bank CDs are a reliable option for medium-term savings goals. By locking in your money for a specific period, you can earn higher interest than a standard savings account.
Why Choose Short-Term Investments?
Short-term investments provide an opportunity to grow money safely for goals within five years. Options like FDIC-insured accounts and government-backed bonds offer security and predictable returns. By carefully selecting the right investment based on your timeframe, you can strike a balance between accessibility and growth.
