7 best short-term investments for January 2024 (2024)

You’ve worked hard to put away a stash of cash and build up your rainy-day fund at the bank. The last thing you want to do is put that money at risk in the stock market, where it may be subject to all manner of wild fluctuations.

But if you have a pile of money sitting in your bank account, earning nothing but a few bucks in interest each year, you’re probably leaving money on the table. The good news is that when it comes to your spare cash, there are plenty of short-term investment options that can deliver higher returns while also preserving your capital.

The best short-term investments are ones that offer liquidity, so you can access your capital when you need it most, and the ability to generate income without losing your principal.

In this article, we’ll explain why investing cash is so important and where to find some of the safest short-term interest rates.

What is a short-term investment?

A good definition of a short-term investment focuses on its value as a tool for managing cash flow, saving for near-future expenses or preserving capital. However, these short-term vehicles typically don’t generate the same returns as longer-term investments.

So what are some common short-term investment options?

One popular short-term investment is a money market account. Money market accounts are interest-bearing deposit accounts offered by banks, credit unions and brokerages, where savers can park their funds for short durations.

Another example is Treasury bills, which are short-term government securities with maturities ranging from a few weeks to one year. Certificates of deposit (CDs) are also popular short-term investments. Investing in a CD involves depositing a specific amount of money with a bank for a fixed term, usually ranging from a few months to a few years. In return, investors receive a higher interest rate than they would from regular savings accounts.

Safe low-yield, short-term investments

When it comes to investing, risk and return are related.

While long-term investments, including stocks and real estate, may offer the potential for higher returns, they also carry more risk than traditional short-term investments.

On the other hand, short-term investments, such as Treasury bills and money market accounts, typically generate lower returns but carry less risk. And because short-term investments spend less time in the market, they are less exposed to market volatility. That makes them well suited for capital preservation and quick access to funds.

But don’t forget about that relationship between risk and return. Investments with higher risk can bring bigger profits, but you also stand to lose more.

Meanwhile, investments with a lower yield and less risk grow more slowly, but you’ll sleep better at night knowing that a portion of your money is also tucked in safe and sound.

For example, a short-term bond fund doesn’t yield as much as a long-term fund.

A bond is considered short-term if it matures in more than one year but less than five years. Short-term bond rates fluctuate less than long-term bond rates, as they pay off in a short period of time, reducing the potential for loss or default.

In addition, it’s easier to make an educated guess about where short-term interest rates might be just a few years out, versus 10, 20, or 30 years in the future.

That’s why issuers of long-term bonds compensate investors more for the greater risk they’re taking and why short-term bonds have a lower yield. In return, short-term bondholders have greater peace of mind.

If you want to make money quickly, then safe, low-yield, short-term investments aren’t the place to look. For example, investing cash in a money market, certificate of deposit or high-yield savings account can help safeguard your principal while earning a modest return.

These cash investments are often appropriate for conservative investors seeking low risk, stability, diversification and liquidity within their total asset allocation.

Investors should avoid looking to stocks to generate quick gains since this asset class typically carries more risk than traditional short-term investments like bonds or savings accounts at banks.

What makes a good short-term investment?

A good short-term investment has several key attributes. Those include:

• Liquidity: Investors should be able to readily access their funds without significant penalties or delays if they meet any holding period requirements.
• Capital preservation: By minimizing exposure to market volatility and risk, good short-term investments allow investors to keep more of their money. That’s a different objective than growth, which, of course, pays more but can also be very risky over short periods of time.
• Suitability: If you have a near-term goal, such as buying a new vehicle or paying for a vacation, your risk tolerance on this bucket of money should be low. You don’t want to think about this the same way you might with your retirement money, which you want to either grow as fast as possible or use to generate income.
• Low fees: It’s important to minimize fees in your short-term investments. Low fees mean you have more principal for yourself and less money going to a bank or fund manager.

Top short-term investments of September 2023

A successful short-term investment strategy hinges on several key factors. First, liquidity is critical. You need the ability to access funds quickly and without penalties.

In addition, minimizing exposure to market volatility and risk helps protect your principal, so the money you need will be there when you’re ready.

But you also don’t want to skimp when it comes to the income these investments generate. It’s critical to retain your purchasing power. That’s the idea of protecting your money with a short-term investment in the first place!

Finally, a good short-term strategy aligns with your specific financial goals and risk tolerance. Balancing safety, liquidity and return is the foundation of a sound short-term investment strategy.

For example, investors might allocate a small amount of money to a high-yield savings account, which comes with liquidity and low risk but can still generate a return.

With that in mind, there are plenty of investment options that can help you reach your short-term money goals.

High-yield savings accounts

High-yield savings accounts provide investors with ample interest rates in the current economic environment and easily out-earn money in a traditional savings account. They offer a low-risk way to maintain liquidity and easy access to your money, making these accounts ideal for saving and emergency funds. High-yield savings accounts can be opened at both online banks and traditional brick-and-mortar banks. Online banks generally offer better rates due to lower operating costs.

Certificates of deposit (CDs)

CDs provide higher interest rates than savings accounts with varying maturity periods but have some distinct pros and cons. One pro is that the high interest rates mean your money will grow steadily. And because they are generally insured up to a certain amount, they are considered low-risk.

On the other hand, it’s important to understand that money invested in a CD is locked up for a specified period of time. Whether the term is three months, six months or a year, liquidity is limited. Withdrawing money from a CD early typically results in a penalty, which is fine if you know you won’t need your cash until the term expires. But don’t put money into a CD if there’s a chance you’ll need the cash earlier.

Money market accounts

If you want to combine liquidity with higher interest rates than you’ll find in a regular savings account, consider a money market account. These accounts also come with lower risk, as they’re insured up to $250,000 by the Federal Deposit Insurance Corporation. However, the trade-off is that the interest rates are lower compared to other short-term investment options, and account balances might have minimum requirements or fees. You can open a money market account at a bank, credit union and some brokerage firms.

Treasury bills

Treasury bills, or T-bills, are low-risk government securities with maturities ranging from weeks to one year. Like any investment, these have pros and cons. On the positive side, they offer safety and are backed by the U.S. government. However, T-bills typically yield lower returns than riskier assets like stocks, so don’t be surprised when your stocks outperform. Additionally, interest earned is subject to taxation.

Short-term bond funds

These funds typically hold corporate bonds with a maturity between one and five years. They offer diversification, steady income and lower interest-rate risk than longer-term bonds. The liquidity of an exchange-traded fund (ETF) or mutual fund makes buying and selling easy as investors can easily enter and exit positions at or near their target price, but returns are generally moderate compared to riskier assets.

Mutual funds are investment companies that pool money from investors to buy securities and are managed by professional investment managers, whereas ETFs are pooled investments that trade on stock exchanges and typically track index funds or other asset classes. Keep in mind that management fees will impact overall returns, so do the homework to find funds with low expense ratios. If you’re an investor with a low tolerance for risk, consider avoiding high-yield bonds, also known as “junk” bonds.

Short-term municipal bond funds

Municipal bonds, held in an ETF or mutual fund, can be attractive short-term investments due to their tax advantages, safety and steady income. On the plus side, these offer tax-free interest and lower risk versus stocks. However, yields are usually lower than corporate bonds, and returns may not keep pace with inflation. Also, while they are generally safe, some municipalities may default on their bonds. That’s why it’s important to carefully evaluate credit quality and fees if you’re considering muni bond funds as short-term investments.

Peer-to-peer lending

If you’re open to alternatives beyond banks and brokerages, you can explore online peer-to-peer lending platforms. These connect individuals or businesses seeking loans with investors willing to provide funds.

Pros include potentially higher returns for investors compared to traditional savings accounts, along with the opportunity for diversification. In addition to those advantages, these loans can make good short-term investments because of their predictable cash flows. However, downsides can include default risk, lack of FDIC insurance and potential borrower delinquencies.

Methodology

To identify the best short-term investments, we looked at several factors.

We prioritized low volatility, favoring assets that are less susceptible to the kind of fluctuations you’ll find in the stock market. That minimizes risk for short-term investors.

We also factored in liquidity because short-term investments should be easily and quickly accessible.

Individual risk tolerance levels also factored into our analysis, so we focused on investments that don’t fluctuate wildly during short timeframes as a result of market conditions.

And, of course, we looked for investments that don’t charge high fees to be sure that the costs associated with these investments wouldn’t erode potential returns.