Most investing advice focuses on long-term options for money you won’t need anytime soon. But what about savings you want to grow, without losing access to that money or putting it at significant risk? To help you find the right place for your money, here are the best short-term investments and the returns you can expect from each.
I-bonds are savings bonds issued by the U.S. Treasury. They earn a combination of a fixed interest rate and a variable rate that changes with inflation. The U.S. Treasury sets the variable rate twice per year. Since they’re government-backed, they’re very safe short-term investments. And since inflation is high right now, these are a great short-term, high-return investment.
You can buy up to $10,000 in electronic I-bonds per year. After 12 months, you can cash in your I-bond to get your money back plus the interest. However, if you do that within the first five years, you lose the last three months of interest, so it’s better to wait if possible.
The current interest rate for I-bonds is 4.30%, including a 0.90% fixed rate. That rate applies to I-bonds issued from May 1, 2023 to October 31, 2023.
How to Invest
The simplest way to buy I-bonds is through TreasuryDirect, an official site of the U.S. government. After you create an account, you can invest in I-bonds there.
Treasuries are securities issued by the U.S. Treasury and fully backed by the U.S. government, making them some of the safest short-term investments. The most common types of treasuries include Treasury bills, Treasury notes, and Treasury bonds. The main difference between them is how long they last:
Treasury bills: Sold in terms ranging from four to 52 weeks
Treasury notes: Sold in terms ranging from two to 10 years
Treasury bonds: Sold in terms of 20 or 30 years
Interest rates on treasuries range from about 3.5% to 5.2% as of April 2023. Treasuries are sold at auctions, where their interest rates are set.
Pro Tip: Investing starts with a sound financial plan. See our article: A Guide to Financial Planning for Couples
How to Invest
To buy treasuries, you bid when the U.S. Treasury sells them at auction. You can do this through a TreasuryDirect account or through a brokerage account.
3. Corporate Bonds
A corporate bond is a debt issued by a corporation to raise money. When you buy one of these short-term investments, you’re lending money to that company. In return, it pays you interest for the term of the bond and repays you in full on the bond’s maturity date.
Unlike government-backed bonds, which are extremely secure, the level of risk with corporate bonds varies. To check how safe a corporate bond is, you can look at its bond rating. There are several companies that assign bond ratings based on the company’s creditworthiness.
While ratings systems vary, the highest rating is always AAA (triple A), indicating a very low risk. Any grade with a C or a D indicates a junk bond, meaning a high-risk, high-reward bond.
Pro Tip: Bond ratings are not always the most reliable measure of creditworthiness, especially in a volatile market. (Silicon Valley Bank’s imminent failure was not reflected in its credit rating.)
Corporate bond rates generally range from about 4% to 5% for A-, AA-, and AAA-grade bonds as of April 2023. Yields on junk bonds vary significantly, from about 6% to 15%.
How to Invest
You can buy corporate bonds through a brokerage account.
4. Bond ETFs
An exchange-traded fund (ETF) is a type of investment vehicle that’s traded like a stock. While many ETFs invest strictly in stocks, there are also bond ETFs that only invest in bonds.
Some bond ETFs put their money in a specific type of bond, such as treasuries, corporate bonds, junk bonds, or international bonds. Others invest in multiple types of bonds, so there are plenty of options. You could look for the best short-term treasury ETF, the best corporate bond ETF, or simply the best short-term bond ETF overall.
In addition to diversifying your bond holdings, bond ETFs are advantageous as a short-term investment because you don’t need to hold them for a minimum amount of time. You can buy and sell them whenever you want.
Bond ETF returns vary heavily based on each fund’s performance. More conservative bond ETFs may return 1% to 2% per year. Others that take on more risk can return 6% or more.
How to Invest
You can buy bond ETFs through a brokerage account.
Pro Tip: You can start teaching your kids about investing as early as preschool if you stick to the right topics. See our guide: Financial Literacy for Kids (of All Ages!)
A certificate of deposit (CD) is a bank account with a fixed interest rate and term. When you open a CD, you make a one-time, lump sum deposit. You’re required to leave the money in the CD until the end of the term, which is called the maturity date. If you need to withdraw your money before then, there’s typically a penalty, unless you choose a no-penalty CD.
Financial institutions normally offer CD terms ranging from six months to five years, although there are CDs with longer and shorter terms. Since there are plenty of term options, you can choose a term length for this short-term investment that fits your needs.
The best CDs offer rates of about 4% to 5% as of April 2023. Rates vary depending on the term length and the bank you choose, so it’s smart to shop around. The best rates on short-term CDs are generally lower than rates on longer CDs, although this isn’t always the case.
How to Invest
You can open a CD with most banks and credit unions.
6. High-Yield Savings Accounts
A high-yield savings account is an account that has an above-average annual percentage yield (APY). This is one of the more flexible short-term saving options. You can deposit and withdraw the funds whenever you want.
Just keep in mind that many banks limit the number of withdrawals you can make per month, with six being a typical limit. If you exceed your account’s limit, you may be charged a fee.
High-yield savings accounts offer rates of about 3.0% to 4.5% as of April 2023. Rates are variable, not fixed, so they can fluctuate with interest rates.
How to Invest
High-yield savings accounts are mainly available through online banks and credit unions. Big banks and brick-and-mortar banks usually don’t offer this short-term investment.
7. Money Market Accounts
Money market accounts combine features from savings and checking accounts. They often have high interest rates, like savings accounts. In addition, they give you easy ways to access your funds through either checks, a debit card, or both.
These short-term investment accounts often have larger minimum deposit requirements than other bank account options. And even though it’s easy to make withdrawals, they still have withdrawal limits, just like savings accounts.
The best money market accounts are offering rates of about 3.0% to 4.5% as of April 2023. Rates are variable and can fluctuate based on market conditions.
How to Invest
You can open a money market account with a bank or credit union. Just like with high-yield savings accounts, the best rates are typically found with online financial institutions.
Pro Tip: A budget will help you free up more money for investing. See our article on The 23 Budget Categories You Need in Your Budget
How to Choose the Best Short-Term Investments
There are a couple of simple tips you can follow to choose the best short-term investments.
Most importantly, prioritize stability. While people sometimes try to find the best short-term stocks, it’s usually better to avoid volatile investments like these entirely. You don’t want the value of your investment to drop right before you need to withdraw your money. Stick to the high-yield short-term investments we covered above.
Also, consider how much liquidity you need. If you might need the money you’re investing at any moment, look for investments that allow easy access. High-yield savings accounts, money market accounts, and no-penalty CDs are all good options. The best short-term bond funds can also work well, assuming you stick to funds invested in safe bonds, such as treasuries.
If you have a set amount of time until you need the money you’re investing, you can choose an investment with a fixed term. For example, if you have money you plan to use to buy a home in three years, you could put it in a three-year treasury note or CD.
Investing for the Short Term
Short-term investments are a smart way to grow your money while still having it available for your upcoming financial goals. Monarch Money can help you track your investments — and your progress towards those goals.