8 best short-term investments in December 2024
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If you’re looking to invest money for the short term, you’re probably searching for a safe place to stash cash before you need to access it in the not-so-distant future. The good news is that interest rates remain high following the Federal Reserve’s recent attempts to bring down inflation, and many short-term investments offer solid yields.
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Short-term investments minimize risk, but at the cost of potentially higher returns available in the best long-term investments. As a result, you’ll ensure that you have cash when you need it, instead of squandering the money on a potentially risky investment. So, the most important thing investors should be looking for in a short-term investment is safety.
What is a short-term investment?
If you’re making a short-term investment, you’re often doing so because you need to have the money at a certain time. If you’re saving for a down payment on a house or a wedding, for example, the money must be at the ready. Short-term investments are those you make for less than three years.
If you have a longer time horizon – at least three to five years (and even longer is better) – you can look at investments such as stocks. Stocks offer the potential for much higher returns. The stock market has historically risen an average of 10 percent annually over long periods – but it has proven to be quite volatile. So the longer time horizon gives you the ability to ride out the ups and downs of the stock market.
Short-term investments: Safe but lower yield
The safety of short-term investments comes at a cost. You likely won’t be able to earn as much in a short-term investment as you would in a long-term investment. If you invest for the short term, you’ll be limited to certain types of investments and shouldn’t buy riskier assets such as stocks and stock funds. (But if you can invest for the long term, here’s how to buy stocks.)
Short-term investments do have a couple of advantages, however. They’re often highly liquid, so you can get your money whenever you need it. Also, they tend to be lower risk investments than long-term investments, so you may have limited downside or even none at all.
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Overview: Best short-term investments in December 2024
1. High-yield savings accounts
Overview: A high-yield savings account at a bank or credit union is a good alternative to holding cash in a checking account, which typically pays very little interest on your deposit. The bank will pay interest in a savings account on a regular basis.
Who are they good for? A high-yield savings account works well for risk-averse investors, and especially for those who need money in the short term and want to avoid the risk that they won’t get their money back.
2. Cash management accounts
Overview: A cash management account allows you to put money in a variety of short-term investments, and it acts much like an omnibus account.
Who are they good for? A cash management account gives you a liquid cash account that allows you to access your money quickly, and it may pay interest on your holdings.
3. Money market accounts
Overview: Money market accounts are another kind of bank deposit, and they usually pay a higher interest rate than regular savings accounts, though they typically require a higher minimum investment, too.
Who are they good for? Money market accounts are good for those who need their money in the near future and need to be able to access it without any strings attached.
4. Short-term corporate bond funds
Overview: Corporate bonds are bonds issued by major corporations to fund their investments. They are typically considered safe and pay interest at regular intervals, perhaps quarterly or twice a year.
Who are they good for? Bond funds are good for investors who want a diversified portfolio of bonds without having to analyze individual bonds.
They’re also good for individual investors who don’t have enough money to buy individual bonds, and the risk-averse should like them, too.
5. Short-term U.S. government bond funds
Overview: Government bonds are like corporate bonds except that they’re issued by the U.S. federal government and its agencies.
Government bond funds purchase investments such as T-bills, T-bonds, T-notes and mortgage-backed securities from federal agencies such as the Government National Mortgage Association (Ginnie Mae).
Who are they good for? Short-term government bonds are good for risk-averse investors who want a very safe investment.
Bond funds are good for investors who want a diversified portfolio of bonds without having to analyze individual bonds.
6. Money market mutual funds
Overview: Don’t confuse a money market mutual fund with a money market account. While they’re named similarly, they have different risks, though both are good short-term investments.
A money market mutual fund invests in short-term securities, including Treasurys, municipal and corporate debt, as well as bank debt securities.
And since it’s a mutual fund, you’ll pay an expense ratio to the fund company from the assets being managed.
Who are they good for? Money market mutual funds are good for those looking to have access to their cash while earning a yield on it.
7. No-penalty certificates of deposit
Overview: A no-penalty certificate of deposit, or CD, lets you dodge the typical fee that a bank charges if you cancel your CD before it matures.
CDs are time deposits, meaning when you open one, you’re agreeing to hold the money in the account for a specified period of time, ranging from periods of weeks up to many years, depending on the maturity you want.
In exchange for the security of having this money in its vault, the bank will pay you a higher interest rate.
Who are they good for? Those looking for some access to their cash while earning some interest may find the no-penalty CD useful.
A no-penalty CD may also be attractive in a period of rising interest rates, since you can withdraw your money without paying a fee and then deposit it elsewhere for a higher return.
8. Treasurys
Overview: Treasurys come in three varieties – T-bills, T-bonds and T-notes – and they offer the ultimate in safe yield, backed by the AAA credit rating of the U.S. federal government. But it’s the T-bills that are the short-termers, with a maturity of up to a year.
Who are they good for? Buying individual Treasurys is better for investors who know exactly what kind of bond they want, because the risks and reward differ by bond.
Rather than buying a government bond fund, you might opt to buy specific securities, depending on your needs.
Best investments for short-term money
| When you need the money | Investment Options | Potential Interest Rate | Risk |
|---|---|---|---|
| A year or less | High-yield savings and money market accounts, cash management accounts | 4.5+ percent | Low risk and accounts are backed by the FDIC. |
| Two to three years | Treasurys and bond funds, CDs | Bank products and Treasurys are safest, corporate bond funds slightly less so. | |
| Three to five years (or more) | CDs, bonds and bond funds, and even stocks for longer periods | 4.5+ percent (or much more if you’re investing in stocks) | CDs and bonds are relatively low risk compared to stocks, which can fluctuate a lot and are high risk. |
What makes a good short-term investment?
Good short-term investments may have many things in common, but they are typically characterized by the following three traits:
- Stability: Good short-term investments don’t fluctuate too much in value, as many stocks and bonds do. The money will be there when you need it, and is often protected by FDIC insurance or a government guarantee.
- Liquidity: A good short-term investment usually offers high liquidity, meaning that you can access the cash invested in it quickly. In the case of certain CDs, you’ll know when the money becomes available, and you can always redeem the CD, though it will often come with a penalty, unless you opt for a no-penalty CD.
- Low transaction costs: A good short-term investment doesn’t cost a lot of money to get into or out of, unlike a house, for example. That’s especially important when yields on short-term investments are low.
You make short-term investments because you think you might need the money fairly soon, so it’s important to have confidence that any short-term investment you make will be there when you need it. Safety should take priority over returns when investing for the short-term.— Brian Baker, CFA, Bankrate Investing and Retirement Senior Writer
These features mean that your money will not be at risk and will be accessible when you need to use it, which is one of the major reasons to have a short-term investment. In contrast, you can earn a higher return on long-term investments but must endure more short-term volatility. If you need that money, though, you might have to sell a long-term investment at a loss to access it fully.
Tips for investing money for five years or less
If you’re investing money for five years or less, you should have a different process than if you were investing with a time horizon of decades. Instead, you need to approach short-term investing with the following tips:
- Set your expectations. Short-term investments will have lower potential returns than long-term investments, so it’s important to set your expectations appropriately.
- Focus on safety. In general, if you’re investing for the short term, you should focus on safety rather than return. Your money should be there when you need it.
- A little extra return may not be worth the extra risk. With short-term investments typically offering low returns, it can be easy to try to get a little extra return at the expense of a lot more risk. But focus on why you’re investing for the short term.
- Pick the investment based on your needs. You might be able to earn a little extra on that CD, but what if you need to access the money before it matures? Calibrate your investment type to your needs.
- Not all short-term investments are equal. Bank products are backed by the FDIC, so you won’t lose any principal as long as you stay within the FDIC’s limits. But market-based products, even safe ones like short-term bond funds, could decline over short periods. Understand the risks of your investments.
Short-term investments are usually pretty safe, especially relative to longer-term investments such as stocks or stock funds. But be sure you understand what you’re investing in.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
