Investing for the short term requires different strategies than investing for the long term. If you need the money you’re investing in five years or less, there are good reasons to favor investments that are likely to protect your savings over those that offer high returns.
The following four investments have the potential to grow your money at a faster rate than it would in a regular savings account. But they also offer enough stability and security to leave you confident you’ll still have your money when you need it.
1. High-yield savings accounts
The typical interest rate on a standard savings account is several tenths of a percent. That means any money you put in one grows at a snail’s pace. These days, however, it’s not difficult to find special savings accounts that offer significantly higher rates of one percent or more. Most of these high-yield savings accounts are offered by online banks, which are able to offer better rates by avoiding the expenses that come with brick-and-mortar locations. Some traditional banks and credit unions also offer high-yield accounts for customers who meet certain qualifications.
Pro: Easy access to your money and the peace of mind that comes with knowing your savings are fully backed by the federal government through Federal Deposit Insurance Corporation (FDIC) insurance. All FDIC-insured accounts are guaranteed up to $250,000.
Con: Interest rates are typically in the sub 2 percent range, which is still low enough that the growth of your savings is not likely to keep pace with inflation.
2. Certificates of deposit
Most banks and credit unions offer certificates of deposit with a variety of term lengths, typically ranging between three months and five years. When you place your money in a CD, you agree to leave it deposited for the length of the term in exchange for earning a set interest rate. Longer terms bring higher returns.
Pro: CDs are FDIC-insured, like savings accounts, but they often deliver higher returns than savings accounts (even high-yield ones) for longer term lengths.
Con: Often you can’t access your money until the end of the CD term without paying a penalty.
3. Money market accounts
Money market accounts offer a way to invest in the market for short-term debt that includes CDs, U.S. Treasuries and a range of other securities. These accounts work similarly to regular savings accounts and offer the same FDIC-insured security. Money market mutual funds are another method of investing in money market securities, but these funds can rise and fall, and they aren’t FDIC-insured.
Pro: Money market accounts often deliver higher returns than savings accounts, along with easy access to money and, in some cases, perks like a debit card and the ability to write checks.
Con: Most money market investments have a minimum required investment, so if you have a modest sum to save you may need to look for another option.
4. Bond funds
If you are investing for a period longer than 18 months but less than five years, consider buying a short-term bond fund. These mutual funds tend to offer higher returns than all of the investments mentioned above. However, they also tend to be less stable, so are generally not well-suited for very short-term investing.
Pro: Potential for higher returns than other short-term investment options, along with relatively easy access to savings.
Con: Significantly higher risk than other methods of short-term saving, and plus minimum requirements to invest.