Are you looking for a short-term investment option that can provide a decent return without the risk of a long-term commitment? It usually doesn’t make sense to invest money in the stock market if you need it in the next year or so. Whether you are saving for a down payment on a home, planning a wedding, or simply looking to grow your money in the short-term, here are six of the best short-term investments to consider in 2023.
What are short-term investments?
Short-term investments are types of investments, like brokered CDs and T-Bills, that are typically held for a short period of time, usually one year or less. They are designed to provide investors with a relatively low-risk way to earn a return on their money within a short timeframe.
Money loses value over time because of inflation. So you need a short-term investment that gives you a decent return to catch up with inflation. If you invest in stocks, then you probably don’t want to touch that money over the next several years and there is additional risk involved. However, short-term investments can provide a higher interest rate, limited risk and access to your money when you need it.
Best Short-Term Investments in 2023
If you are looking for somewhere to invest your money with low risk, here are 6 best short-term investments for 2023.
1. High-Yield Savings Accounts
One of the safest and easiest short-term investment options is a high-yield savings account. They work the same as a standard savings account. You deposit money and interest is compounded daily and then typically paid to you monthly. You can open a high-yield savings account online and there are no monthly fees. They are FDIC-insured for up to $250,000.
High-yield savings accounts offer higher interest rates than traditional savings accounts. Many banks pay almost nothing on traditional savings accounts. However, some high-yield accounts can offer annual percentage yields as high as 5.05%. That may not seem like a lot compared to long-term stock returns, but it’s a great rate for almost no risk.
A high-yield savings account can be a great place to store your emergency fund or cash as you can access the money at any time and you don’t need to worry about losing money. High-yield savings accounts are insured by the FDIC, up to $250,000 per depositor per bank. There is no other investment that offers you the ease of access that you get with a high-yield savings account.
When you look at a high-yield savings account, don’t just look at the rate. After you compare the rate, check if they do mobile check deposits, the daily limit of mobile check deposits, and the daily limit of ACH transfers.
|Rate||Minimum Balance to Get Rate||Mobile Check Deposit?||Daily Limit of Mobile Deposit||Daily Limit of ACH Transfer (out/incoming)|
|Capital One 360||4.30%||$0||Yes||$35,000?||$10,000?|
|LendingClub||4.65%||$100||Yes||$50,000||$10k to $250k|
|CIT Bank||5.05%||$5,000||Yes||$10,000||$250k/ $500k|
2. Money Market Accounts
Money market accounts, or MMAs, are similar to high-yield savings accounts but typically require a higher minimum balance to earn the highest interest rates. Money market accounts typically offer higher interest rates compared to savings accounts, checking accounts, or high-yield savings accounts. Most money market accounts are FDIC insured for up to $250,000. You are typically limited to 6 transactions per billing cycle.
Most banks have a low money market account rate. To get a high money market account rate, open a brokerage account with a brokerage firm such as Vanguard, Fidelity, or Schwab.
As of December 1, 2023, money market account rates are:
- Fidelity MM: 4.99% to 5.06%
- Schwab MM: 5.25%
- Vanguard MM: 5.30% ($3,000 minimum investment)
3. Cash Accounts
Cash accounts are a safe and secure place to hold funds that can be easily accessed when needed. Only a few people know about this option and you can only access this if you have a brokerage account. The rates at the moment are about 4.75% to 5.30%, which is more than high-yield savings but less than a money market account.
One of the advantages of a cash account is that you can use this account to pay your bills and there are no limits on the number of withdrawals per month. They also offer a whopping $1.25m to $3m FDIC coverage. They have higher FDIC coverage because they split up your assets and deposit them for you into four or more separate banks.
Good cash accounts are mostly offered by robo advisors like Wealthfront & Betterment. Vanguard also has a new pilot Cash Plus Account: 4.50%. However, this is currently by invitation only, to select clients. Unfortunately, I haven’t received my invitation from Vanguard and I am deeply hurt 🙂
As of December 1, 2023, cash account rates are about 4.75% to 5.30%.
4. Ultra Short-Term Bond ETFs
Ultra Short-Term Bond ETFs are exchange-traded funds that invest in a diversified portfolio of fixed-income securities with maturities of less than one year. They are high-quality bonds issued by the government and companies.
One of the advantages of ultra-short-term bond ETFs is their liquidity. These funds can be bought and sold throughout the day on an exchange. Another advantage is that they tend to have lower expense ratios than actively managed funds, so investors can keep more of their returns. Also, the rates are usually slightly higher than money market funds or high-yield savings accounts.
The main downside of short-term bond ETFs is price fluctuations and potential risk. They carry some degree of credit and interest rate risk. Credit risk refers to the possibility that the issuer of the debt security may default on its obligations and interest rate risk refers to the possibility that interest rate changes may negatively impact the value of the bond. However, they are less susceptible to interest rate fluctuations than longer-term bond funds.
As of December 1, 2023, the current ultra short-term bond ETF rates are:
- Vanguard: 5.52%
- Fidelity: 5.41%
- iShares: >3% (has a higher credit risk)
5. Brokered CDs
Brokered CDs, or certificates of deposit, are a safe and secure way to earn a guaranteed return on your investment. They are similar to traditional CDs but they are bought and sold through a brokerage firm rather than a bank. This means that you must open a brokerage account with Vanguard or Fidelity if you want to purchase brokered CDs.
Brokered CDs are available in various terms ranging from a few months to several years. They typically offer higher interest rates than savings accounts or money market accounts. They are also FDIC-insured for up to $250,000.
The main downside of brokered CDs is that you need to lock up your money for several months. Brokered CDs also come with some risk. The value may fluctuate with changes in interest rates and market conditions. Investments may also be subject to capital gains or losses if they sell before maturity.
As of November 30, 2023, the interest rate is over 5.50% for 7-9 month, 10-12 month and 13-18 month maturity terms.
6. Treasury Bills
Treasury bills, also known as T-bills, are short-term government bonds that mature in less than a year. They are considered one of the safest investments because they are backed by the US government. T-bills offer competitive returns and they are a tax-efficient investment. The interest earned is exempt from state and local income taxes.
When you purchase T-Bills, you purchase them at a discount from their face value. For example, if the face value you get upon maturity is $2,000, you might buy it for $1,900.
The main downside is that you must lock up your money for several months. You can purchase T-Bills directly from the Treasury Direct website or through a brokerage firm such as Vanguard or Fidelity. They are typically sold in $1,000 increments.
As of November 30, 2023, the current T-bill rates are:
- > 5% for 1 to 18 months
What to look for in a short-term investment
When you are looking for a short-term investment, there are several things to consider. Some of these include:
- Low Risk. If you need the money soon, then you can’t assume much risk. While no investments are entirely risk-free, you may want to choose investments that have a relatively low risk of losing value.
- Return: You want to maximize your return on investment. However, higher returns usually come with higher risk. Look for investments that have a decent return but are still relatively safe.
- Liquidity. Look for investments that are easy to buy and sell quickly. Many short-term investment options allow you to access your money immediately, although some charge a penalty for early withdrawal.
- Stability. If you need your cash within the next 12 months, you don’t want to invest in volatile stocks. You won’t have the time to ride out the volatility.
- Low Transaction Costs. The more frequently you move money in and out of an investment, the faster transaction costs add up.
The pros and cons of the different short-term investment options
|High-yield savings account||Safe and insured by the FDIC |
Can be used to pay bills
|Lower returns than other investments|
Some banks have minimum balance requirements
Inflation can outrun your gains over time
You can typically only make up to 6 withdrawals per month
|Money market accounts||Very liquid|
Very low risk
|Cannot be used to pay bills|
Need to open a brokerage account
|Cash accounts||Very liquid|
You can use this to pay your bills
Insured by the FDIC for over $1 million
No limit on the number of withdrawals per month
|You must have a brokerage account|
Under certain circumstances, your money may be moved to a non-FDIC-insured bank
|Ultra short-term bond ETFs||Lower risk than other ETFs|
Low expense ratios
|There is some risk involved|
Takes 3 days to settle after you sell
|Brokered CDs||Safe and insured by the FDIC |
Wide range of maturities available
Returns are locked in
You need to lock your money up for several months
Potential penalty if you withdraw early
|Treasury Bills||Backed by the full faith and credit of the United States government|
Wide range of maturities available
Returns are locked in
Generally exempt from local and state taxes
|You need to lock your money up for several months|
Potential for penalty if you withdraw early
Is there anything that I should know before investing for the short term?
Before you decide on your short-term investing strategy it’s important to think of your goals and risk tolerance. Long-term investing is the key to building your wealth over time. However, there are times when a short-term investment strategy is best, such as when you need access to cash quickly, for building emergency savings, or for saving for a near-term liability such as a down payment for a house or tuition payments.
What is the highest-yield short-term investment as of December, 2023?
As of December 1, 2023, the highest yield short-term investment is a 10-12 month brokered CD. The rate is around 5.65%.
What are the benefits of short-term investing?
Some benefits of short-term investing include:
- Quick returns
- High flexibility
- High liquidity
- Typically lower risk than long-term investments.
Overview of the best short-term investments in 2023
|Investment Type||Safety||Liquidity||Average Rate (as of December 1, 2023)|
|High-yield savings accounts||High||High||4.25% - 5.05%|
|Money market accounts||High||High||4.99% - 5.30%|
|Cash accounts||High||High||4.75% - 5.30%|
|Ultra short-term bond ETFs||Medium||High||3% - 5.52%|
|Brokered CDs||High||Low||5.40% - 5.65%|
|Treasury Bills||High||Low||5.12% - 5.41%|
What is the biggest risk of short-term investments?
The greatest risk of short-term investments is that you lose out on higher interest rates while your money is tied up in a timed product like T-Bills or brokered CDs.
Where can I invest $10,000 for one year?
Where to invest $10,000 for one year will depend on your goals and overall financial strategy. We have outlined many short-term investments that may be suitable. However, it’s best to consult with a financial advisor to determine the best investment strategy for you.
Where should I invest my money for 3 months?
We have outlined many options to invest your money short-term and the decision is entirely up to you. If you don’t want to lock your money up for any term, then a high-yield savings account or a money market account may be best for you. If you don’t need that money until after 3 months then you might want to invest in a 3-month brokered CD or T-bill.
Is a short-term investment an asset?
Yes, a short-term investment is an asset. These investments are typically considered liquid assets as they can be sold quickly and easily for cash if needed.
Short-term investing in 2024
Short-term investing can be an excellent way to earn a decent return on your money without the long-term commitments of other investments. Whether you choose a high-yield savings account, money market account, cash account, ultra short-term bond ETFs, brokered CDs, or T-bills, it’s important to do your research and choose an investment that aligns with your short-term financial goals and risk tolerance. If you’re not sure which one of these you should use for your short-term investments, and you’re interested in maximizing your money through a comprehensive financial plan, consider hiring a fiduciary financial planner. Schedule a free discovery call with one of our financial advisors today!
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.