5 Best Short-Term Investments Right Now

Short-term investments balance risk with reward: If you have a near-term goal you want to save for, you want to earn the best possible return while taking the lowest amount of risk.

The best short-term investments should help you do that: Provide an easily accessible, safe place to park money for your goals, while also earning some interest.

In this article, we break down some of the best investments for money you plan to use in under five years.

What are short-term investments?

A short-term investment is an investment that you can easily convert to cash, such as a high-yield savings account, money market account or certain bonds.

If you’re investing in the stock market, it’s generally considered a good idea to plan to keep your money invested for at least five years — that allows you time to ride out market volatility. But a savings goal of five years or less doesn’t mean you need to let your cash sit idle. There are several ways to help your money grow, even in a limited time frame.

Short-term investments offer different interest rates and investment returns than long-term investments. For the most part, growing money short-term through interest-bearing accounts is extremely low risk. You go into the agreement knowing how much interest you’ll earn over a preset period of time.

Best short-term investment options

1. High-yield savings account

Potential interest rate: 4%+.

NerdWallet’s analysis shows that the annual percentage yields for high-yield online savings accounts are currently above 4%. This may not sound like much, but it’s higher than 0.41%, the current national average interest rate on savings accounts and what you’ll likely be offered at your hometown bank branch ^[0]

Bank savings accounts are FDIC-insured, meaning your money is protected up to $250,000 per institution, per depositor, in case of a bank failure.

» Our editorial picks for the best high-yield savings accounts

2. Brokerage cash sweeps

Potential interest rate: 4%+

Some — but not all — brokerage firms pay a high interest rate on uninvested cash. This could be money you've chosen not to invest, dividend payments that aren't reinvested, profits from the sale of an investment or other cash that has accumulated in your account.

Some brokers may call this buying power — it is effectively the cash available to buy securities. But it doesn't have to be used that way, and if you opt for a brokerage firm that pays a high interest rate, you can earn a high return on that idle money. One thing to keep in mind: In most cases, this uninvested cash will be covered by SIPC insurance, not FDIC insurance. SIPC protects up to $500,000 (up to $250,000 of that can be cash) per person, per brokerage account in the event the brokerage firm becomes insolvent.

» View our editorial picks for brokers that pay high interest rates

3. Cash management account

Potential interest rate: 3%+.

Another alternative for short-term savings is a cash management account. These accounts are typically offered by robo-advisors and online brokerage firms. Some cash management accounts provide check writing, mobile check deposit, bill pay, money transfers, goal-setting and overdraft programs.

To provide insurance, cash management accounts often sweep funds into partner banks, where the funds will then be covered by that bank's FDIC insurance. In some cases, the CMA will partner with a number of different banks, which can raise your overall FDIC insurance limit since part of the limit is per-institution.

» View our editorial list of the best cash management accounts

4. Short-term bond funds or Treasury accounts

Potential interest rate: 4%+.

A bond is a loan to a company or government that pays back a fixed rate of return. A bond is generally considered a safer investment than stocks, but the are still some risks: The borrower could default, or bond values could decline when interest rates rise.

To reduce the risk of default, choose bond funds that primarily own government bonds or invest through a Treasury account, which typically invests in Treasury Bills, holds them to maturity and then reinvests the proceeds in more T-bills. (NerdWallet has a Treasury account as part of its NerdWallet+ offering, as does Public, an online brokerage firm we review. Wealthfront, a robo-advisor, offers an automated bond ladder that similarly invests in U.S. Treasurys. You can purchase bond funds via an online brokerage account.

» View our editorial picks for the best brokers for investing in bonds

5. Bank certificates of deposit, or CDs

Potential interest rate: 3% to 4%, depending on CD term.

CDs can be a good risk-free savings option for money you are sure you don’t need for a set period of time. CDs offer a pre-set, guaranteed interest rate if you lock your money away for a set term (ranging from three months to five or more years). In general, the longer the term, the higher the interest rate.

Remember that you may want to avoid locking your money up in a long-term CD when interest rates are rising. However, when rates are expected to fall, CDs can allow you to lock in a high rate. If you need to withdraw your money before the CD term ends, you’ll typically pay a penalty of three to six months’ interest. Also, note that CDs may have a minimum deposit requirement.