If your idea of investing is socking money away into a checking account, you might be disappointed to find that it pays little to no interest. Without any interest, your cash actually starts losing value, as the cost of goods goes up over time. Inflation is a cash killer.
Maybe you need the cash short-term, and that’s why it’s in your checking account. But even though you may want access to your funds whenever you want, you still have a few solid options for the best way to invest money short-term.
Five short-term investment strategies
Short-term investments are a viable alternative to the traditional savings account. They usually pay higher interest rates while keeping your money safe.
If having easy access to your cash is important, just know that some investments let you withdraw funds without a penalty. Here’s a look at a few of the best short-term investments options you can access with ease.
High-yield savings account
If a high-yield savings account sounds a lot like a savings account on steroids, you’re not half wrong. With higher interest rates, you will enjoy watching your balance grow faster. High-yield accounts work best when you plan to save over a few years as you work your way towards financial freedom.
Best for: People with savings goals spanning a couple of years rather than a couple of months.
Benefits: Money in a high-yield savings account earns more interest than money in a traditional bank account. High-yield savings accounts also keep your money safe because the Federal Deposit Insurance Company (FDIC) or the National Credit Union Administration (NCUA) insures accounts up to $250,000.
Advantages: You can earn more money with a high-yield savings account, and you also have the flexibility to pull your funds out when needed.
Disadvantages: If you live paycheck to paycheck and need easy access to your money, a high-yield savings account may not be the best fit. Not only will you not see your money grow by taking it out early, but you might also be penalized if you dip into the account too many times.
Certificate of deposit (CD)
A certificate of deposit is a type of savings account that holds a specified amount of money for a fixed period, typically from six months up to five years. CDs receive a higher interest rate than most other savings options, but you are charged a penalty if you take out the cash before the term of your CD is up.
Best for: People seeking to earn a higher interest rate and don’t need to access their savings account for a fixed period.
Benefits: Since CDs pay higher interest rates than traditional savings accounts, you can make more money. FDIC insurance also secures CD deposits.
Advantages: CDs are a safe and effortless way to build wealth. CDs typically have higher interest rates than traditional savings accounts. Getting hit with a penalty if you take money out early may serve as a powerful incentive to keep your savings intact.
Disadvantages: By nature, CDs are designed for saving. If you run into financial difficulties, expect to pay an early withdrawal penalty to take your money out.
Money market account
Money market accounts are like a hybrid between savings and checking accounts. They pay higher rates of interest, but you can only use a check or debit card to access your funds.
Best for: Individuals who want a higher return on their savings with flexible ways to get the money when needed.
Benefits: Money market accounts let you earn a higher interest rate while maintaining easy access to your money.
- Money market accounts typically carry a higher interest rate than traditional checking accounts.
- You must use checks or a debit card to access your funds.
- Since they are FDIC-approved, money market accounts are a safe place to hold your money.
- Money market accounts typically require a minimum balance to open and maintain the account.
- You could incur penalties if you fall below the minimum balance.
- Since funds are easier to access in a money market account, the ease of accessibility may thwart your long-term savings goals.
A debt instrument issued by city and local governments is known as a municipal bond. Commonly referred to as “munis,” these bonds are typically used to raise funds for capital investment in projects revolving around public housing, schools, hospitals, roads, bridges, and utilities.
Best for: Investors who want to build wealth tax-free while remaining liquid.
Benefits: Municipal bonds are a way to generate a higher return than traditional savings accounts.
- You don’t pay federal tax on the interest earned.
- Bond earnings may be exempt from state and local taxes.
- Municipal bonds are actively traded on secondary markets, making it easy to access cash if you need it.
- If you sell your municipal bond when interest rates rise, you will lose some of the bond’s value. That’s because bonds are valued according to current interest rates.
- Bonds are backed by the project or revenue that they are financing. Although rare, if the municipality runs into severe financial problems, you may never see the principal, which is what you invested if you bought a newly-issued muni.
- Municipal bonds can lose value during periods of high inflation.
A corporation, municipality, or government may issue bonds to raise money. Like loans, bonds offer a pre-set rate of interest, and they are repaid when due. Short-term bonds usually mature in five years or less, and they are considered safer investments due to their short duration. Many short-term mutual funds can also include bonds.
Best for: Conservative investors who want a liquid investment with less volatility.
Benefits: Short-term bonds typically pay higher rates than many other short-term investments.
- Bond markets typically enable you to sell out of your bonds, giving you access to the cash as needed.
- If you hold the bond all the way to the end of a fixed time period, you’ll earn a fixed rate of return.
- Returns are generally less volatile than the stock market.
- A short-term bond usually pays a lower interest rate than a bond with a longer term.
- Short-term bonds can lose value during times of inflation or rising interest rates.
Build wealth through automated investing
Short-term investments help build wealth with their higher returns. They offer a safer way to grow your savings with FDIC or NCUA deposit insurance. Designed to accommodate shorter time horizons, your investments will never be tied up for long periods.
If you have been kicking around the idea of becoming financially independent and building wealth beyond your savings account, consider automated investing with MoneyLion. With our personalized portfolios, you choose how and where your money gets invested.
These fully-managed accounts have a low monthly fee of only $1, and there’s no minimum balance required. Your portfolio can go from a short-term to a 5-year investment in no time. With automatic recurring payments, MoneyLion makes investing in your future seamless.