Best Short-Term Investments For Your Money: Under 5 Years

When it comes to choosing the best short-term investments for the next five years, there are three main factors to focus on — liquidity, expectations, and risk. You need to keep your cash liquid so it’s easily accessible when you need it, which means you also need to invest in a way that doesn’t put you at too much risk of losing capital. You will likely achieve a lower return than the best long-term investments offer as a result, yet that’s the price you pay for keeping your investment “safe.”

But, what are the best short-term investments out there? In this article, we’ll break down the absolute best investment options for people with the following timelines:

• Best investments for up to three years
• Best investments for up to five years

If you have some cash to invest for up to five years and you’re wondering where to stash it, read on to learn about our top picks and how they stack up in terms of risk vs. reward.

Best Short-Term Investments Comparison Table

Best Investments for Timelines of Less Than 3 Years

When you know you’ll need access to your money in the next three years, you have to choose from low-risk investments that keep your cash liquid and easy to access. The best short-term investments for up to three years can help you do exactly that, although some offer more liquidity than others.

High-Yield Savings Accounts

Potential interest rate: 1.25% or more, depending on the account

High-yield savings accounts offer a risk-free way to invest your money for the short-term, albeit with a much lower guaranteed return than you can get elsewhere. The best high-yield savings accounts come with yields of well over 1% APY, and many charge minimal account fees or no fees at all.

Even more importantly, the best high-yield savings accounts come with FDIC insurance, so your investment of up to $250,000 per account is fully protected if your bank defaults or closes its doors.

If you’re looking for the best high-yield savings account to open online, we suggest checking out offers from CIT Bank and, Discover, and UFB Direct.

• Stability: High
• Liquidity: High
• Transactional Costs: Low

Money Market Accounts

Potential interest rate: 1.50% or more, depending on the account

The best money market accounts pay a little more than the best online savings accounts, and they also provide depositors with ATM cards, checks, and deposit slips. Also note that money market accounts are based on the account balance, not the length of time you invest your money. This makes money market accounts a good option for people who need a place to park their excess cash for the short term with the option to access their funds at any time.

Like other deposit accounts, you can also rest assured that your money market funds will be protected with FDIC insurance. If you’re looking for a money market account that offers the highest potential return, you should check out options from banks like UFB Direct and CIT Bank and UFB Direct.

• Stability: High
• Liquidity: High
• Transactional Costs: Low

Crypto Savings Accounts

Potential interest rate: up to 8.05% APY, depending on the account

Crypto savings accounts also make it possible to earn interest on your crypto deposits, but it’s important to note the changing landscape in this industry. For example, the amount of interest earned in these accounts can fluctuate wildly, and some crypto savings accounts are only available to investors who meet specific requirements.

The best crypto exchanges to check out include Gemini and Celsius in particular, although Celsius only offers interest-bearing accounts to accredited investors. At the moment, Gemini is offering up to 8.05% APY on crypto deposits, which are loaned out to other crypto investors similar to the way traditional banks loan out their funds.

That said, it’s worth noting that having a cryptocurrency savings account is not the same as having a savings account at your bank. Not only do crypto savings accounts come without the protection of FDIC insurance, but there are ongoing concerns about digital theft. Also be aware that you may have to pay fees to sell your crypto and get your money out.

• Stability: Medium
• Liquidity: Medium
• Transactional Costs: Varies

Real Estate Investment Trusts (REITs)

Potential interest rate: Varies, but tends to be higher than other short-term investments

Real Estate Investment Trusts (REITs) offer another way to invest for the short-term with less risk than the best long-term investments. This type of investment is made up of companies that own income-producing real estate that may be commercial, residential, or industrial in nature.

Investing in REITs lets you get exposure to returns from the real estate market without the added stress or gruntwork of being a landlord. REITs also let you invest in real estate with a lot less capital than you need to invest in physical property. For example, a company called Fundrise sells private equity REITs, and investors can open an account and start building a real estate portfolio with as little as $10.

Just keep in mind that returns are not guaranteed with REITs, and that you have the potential to lose money in the short-term. However, Fundrise has performed well since the company’s inception in 2010. After achieving average investment returns of 7.31% for their customers in 2020, the company returned clients 22.99% on their investments in 2021. During the first quarter of 2022, Fundrise investors have earned average returns of 3.49% on their investment.

It’s also important to note that some REITs are more liquid than others. In fact, funds invested with Fundrise may be difficult to liquidate if you need your money quickly.

• Stability: Medium
• Liquidity: Low to Medium
• Transactional Costs: Varies

Short-Term Notes

Potential interest rate: 4.6% or more, and returns can fluctuate

If you’re an accredited investor, you can invest in short-term notes through a company called Yieldstreet. The minimum investment starts at just $500, and short-term notes from Yieldstreet come with no hidden fees or expenses. You can also choose among short-term notes that offer liquidity in as little as six months, so your investment will be somewhat liquid if you have a general idea of when you’ll need to access your money.

When you open an account with Yieldstreet, your monthly interest payments will be paid directly into your Yieldstreet wallet. Getting started with this platform is a breeze as well. All you have to do is open an account, prove your accredited investor status, then link a bank account online in order to transfer your funds. 

• Stability: Medium
• Liquidity: Medium
• Transactional Costs: Low

Best Investments for Up to 5 Years

If you want a place to park your investment for up to five years, you may feel comfortable taking on slightly more risk in exchange for the chance at higher returns. The best short-term investments for up to five years tend to fit that criteria, although they may also offer less liquidity as a result.

Roth IRA

Potential interest rate: Varies based on underlying investments chosen for the account

A Roth IRA is a type of retirement account that can be funded with after-tax income. As a result, you are free to withdraw the contributions you made at any time. However, you cannot withdraw your earnings without a penalty before you reach retirement age, or at least 59 ½.

Once you open a Roth IRA, you can invest in any number of options from mutual funds to index funds, exchange-traded funds (ETFs), or bonds.

This money will grow regardless, and perhaps even until you retire. However, the fact you can access your contributions at any time makes the Roth IRA a smart place to invest over a short period of time, even up to five years.

Just keep in mind that there are Roth IRA rules and income limits that apply. If you’re an exceptionally high earner, you may not be able to invest in a Roth IRA the traditional way as a result.

If you’re looking for the best places to open a Roth IRA, you’ll want to check out M1 Finance, Betterment, and E*TRADE.

• Stability: Varies
• Liquidity: High
• Transactional Costs: Varies depending on which online brokerage firm you use to fund your account

Short-Term Bond Funds

Potential interest rate: Varies

Short-term bond funds are products that are usually only managed by a professional financial advisor. Bonds are not as stable as money market accounts or high-yield savings accounts either, but they do offer the potential to earn a higher yield.

Short-term bonds usually mature in terms within 2 years or less, which can make them an ideal choice for investors with that type of timeline.

Where to buy bonds? Some of the best options for buying short-term bonds include TD Ameritrade, M1 Finance, and E*TRADE.

• Stability: High
• Liquidity: Low to Medium
• Transactional Costs: Varies

Exchange-Traded Funds (ETFs)

Potential interest rate: Varies

Exchange-traded funds (ETFs) are a type of pooled investment that are built to match a specific index, such as the S&P 500. This makes ETFs somewhat similar to index funds, although ETFs can be traded throughout the day while index funds can only be traded at the end of the trading day. Generally speaking, ETFs also tend to come with lower minimum investment amounts, and they can be more tax-efficient than index funds.

In addition to ETFs that track a specific index, investors can also choose among ETFs that track specific sectors of the economy or a specific commodity. Trading fees for ETFs also tend to be on the low end, so they’re a good option for beginning investors who want to diversify their portfolio while also keeping costs down.

The good news about ETFs is the fact you can sell your investment and access your money at any time. On the flipside, you do have the potential to lose money in the short term.

• Stability: Varies
• Liquidity: High
• Transactional Costs: Varies

Short-Term Corporate and Municipal Bond Funds

Potential interest rate: Varies based on the bonds or bond funds chosen

Where a corporate bond is a debt instrument used to raise capital, a municipal bond is issued by a city, a town, or a state in order to raise money for various public projects.

Generally speaking, municipal bonds remain popular because they come with certain tax exemptions, and they are always deemed “safer” since they are issued by local or state governments. In the meantime, corporate bonds are not backed by any government resources, so they’re deemed riskier as a result. On the flipside, corporate bonds may offer the potential for a higher return.

Either way, you’ll need a brokerage account with a firm like TD Ameritrade or E*Trade to be able to trade individual bonds, bond mutual funds, and bond ETFs. Likewise, you can buy municipal bonds through bond dealers, banks, and brokerage firms.

• Stability: Varies
• Liquidity: Medium
• Transactional Costs: Varies

Series I Savings Bonds

Potential interest rate: 9.62%, although this rate fluctuates over time

Series I Savings Bonds are government-backed bonds that earn interest based on a fixed rate and a variable rate that is updated twice per year. For bonds issued now through October of 2022, the rate is 9.62%.

This type of bond doesn’t require you to pay any state income taxes, although federal income taxes apply. Just remember that Series I Savings Bonds aren’t quite as liquid as some other investments. For example, you can only cash them out after you have had them for at least one year. If you cash out your Series I Savings Bonds before five years, you’ll also lose three months of interest.

It’s also worth noting that each individual can only purchase up to $10,000 in Series I Savings Bonds each year. That makes these bonds a poor option if you need to invest $20,000 or you have $50,000 to invest right away.

• Stability: High
• Liquidity: Medium
• Transactional Costs: Low

Bonus Idea: Real Estate Hard Money Loans

Potential interest rate: Varies

Real estate hard money loans work differently than traditional mortgage lending, mostly because the borrowing requirements are looser than a traditional home loan. This means the investor buying a property can get their hands on their loan funds considerably faster (usually a matter of days instead of weeks or months),  yet they pay a higher interest rate and have a much higher down payment requirement.

Investors who put their money into real estate hard money loans take on considerably more risk as a result. That said, the returns can be exceptional for investments that pay off.

Also note that real estate hard money loans usually last for just a few years, which makes them unique from traditional home loans that last 15 to 30 years. That said, investors who take on these loans won’t get their money back until the borrower pays their loan off, so they’re not nearly as liquid as other investments options.

• Stability: Low
• Liquidity: Low
• Transactional Costs: Varies

What I Look for In a Short-Term Investment

There are all kinds of ways to invest your money for the short-term, but you should definitely be picky when it comes to money you may need in the next few years. After all, you want to make sure you aren’t taking on too much risk, especially when it comes to risking substantial loss of capital. Yet, you also need to ensure your money will be somewhat easy to access when you need it.

The main factors I look for when comparing short-term investments include:

• Stability: The best short-term investment options tend to have a low risk of losing money over the short-term, or at least not over any period of three to five years.
• Liquidity: Short-term investments should also be somewhat liquid, or at least accessible within a one to five-year timeline.
• Low Transaction Costs: Short-term investments shouldn’t require you to pay exorbitant fees to access your money or to invest in the first place.

All the short-term investments we have outlined in this guide fit this criteria to a certain extent, although there are certainly some pros and cons to consider with each option we recommend. For example, investing in Series I Savings Bonds gets you a guaranteed return of 9.62%, yet you won’t be able to access your money for a least one year and you’ll give up three months in interest if you cash out your bonds within the first five years.

On the flipside, a high-yield savings account offers considerably less interest than that, but your money is protected with FDIC insurance and easy to access at any time.

With this in mind, you should remember that achieving a higher yield typically means taking on slightly more risk or giving up some liquidity. The best short-term investment for your money will offer a balance of these factors you can live with.