As we saw in our article about holding cash vs. investing, holding cash has a major downside; cash can’t grow without being invested. So most of your savings should be invested, even if you can’t afford to invest those funds long term.
But what should you invest your short-term funds in?
We recently explored five short-term high-yield investment types, so if you’re willing to take on a bit more risk for higher return potential, check out that article! But, in this article, we’re going to focus on options with the lowest risk. Our 10 best low-risk short-term investments are all about keeping your money as safe as possible while earning enough of a return to at least keep pace with inflation.
Liquid. We want you to be able to access your original investment within just a year or two.
Secure. You’ll see several FDIC-insured options on this list. This means that your savings are guaranteed by the US government.
Expected to generate a return. Naturally, the safer your investments, the lower the return potential is. But you should still be able to get a positive ROI with these investments. Ideally, your returns will outpace inflation. However, during periods of high inflation, you might want to tailor your strategy for investing during inflation.
With these criteria in mind, here are the 10 best short-term low-risk short-term investments (in no particular order):
High-yield savings accounts
No-penalty CDs
TIPS
Short-term government bond funds
Short-term bond ETFs
Treasury bills
Cash management accounts
Money market accounts
Money market mutual funds
Real estate
1. High-Yield Savings Accounts
Potential rate of return: .3% - 1.5%
Estimated timeframe: no limit
Risk level: Extremely low
High-yield savings accounts are consistently listed among the best short-term investments because of their liquidity. These accounts serve as traditional savings accounts (you can deposit and withdraw money as needed within the institution's limits), but they offer a higher interest rate than traditional accounts. And they are FDIC-insured, so you will not lose money.
Having said that “high-yield” is a bit of a misnomer. As you’ll see from the other options on this list, you can find low-risk short-term investments with higher rates of return.
High-yield savings accounts are a good option for funds that you need to keep perfectly liquid. Your emergency savings fund, for example, could be kept in a high-yield savings account so you can access it immediately for unexpected expenses.
2. No-Penalty CDs
Potential rate of return: .3% - 1.5%
Estimated timeframe: 3 months to 5+ years
Risk level: Extremely low
CDs (Certificates of Deposit) are FDIC-insured securities that mature on a certain date. With CDs there is no uncertainty. You know how much the CD will cost, when it will mature, and how much it will be worth on the maturity date.
Having said that, short-term investors have gotten themselves into trouble by cashing out their CDs before the maturity date. Withdrawing your funds from a traditional CD before the maturity date typically results in penalty fees. However, with a no-penalty CD, you can access your funds before the maturity date without penalties.
This increased liquidity comes at a price; your returns will be lower than they would be with a standard CD.
3. Treasury Inflation Protected Securities (TIPS)
Potential rate of return: 0.1%+, plus value adjustment based on inflation
Estimated timeframe: 3 months to 5+ years
Risk level: Very low
Low-risk investing is about balancing the safety and accessibility of your funds while making sure your money doesn’t lose value due to inflation. Treasury inflation-protected securities (TIPS) are specifically designed to shield your money from inflation.
Your TIPS returns are tied to the consumer price index (CPI), which measures inflation. The higher the inflation, the higher your returns.
While you can purchase TIPS from the US Treasury in terms of 5, 10, or 30 years, TIPS are also traded on the secondary market, which allows you to buy and sell them short-term.
4. Short-Term Government Bond Funds
Potential rate of return: .5% - 3%
Estimated timeframe: 3 months to 2+ years
Risk level: Very low
Just like companies, departments of the government can issue bonds to raise funds. A short-term government bond fund is a bundle of government bonds, specifically designed as short-term investments. These can include bonds issued to raise funds for infrastructure projects, as well as mortgage-backed securities from the Government National Mortgage Association (Ginnie Mae).
Because these bond funds are backed by the US government, they are safer than corporate bond funds, which are backed by companies. Corporate bond funds may have higher return potential, but government bond funds are the lower-risk option.
Investing in government bond funds might also provide some tax advantages. Your earnings might be exempt from federal and state income taxes and/or capital gains taxes.
5. Short-Term Bond ETFs
Potential rate of return: .5% - 3.5%
Estimated timeframe: 3 months to 2+ years
Risk level: Low
Short-term bond ETFs are exchange-traded funds that invest solely in short-term bonds. Instead of investing in individual corporate bonds, you can invest in this type of ETF, which bundles short-term bonds from multiple corporations. And, since these bond funds can be traded on the stock market exchange, you can sell your bonds whenever you need to access your capital.
While short-term bond ETFs offer lower yields than individual short-term corporate bonds, they also offer additional protection in the form of diversification. By including bonds from multiple corporations, the value of your investment won’t plummet because one corporation has a bad quarter.
6. Treasury Bills (T-Bills)
Potential rate of return: .1%+
Estimated timeframe: 4 weeks to 1 year
Risk level: Extremely low
Treasury bills are issued by the US Federal Government. You can purchase bills at a discount, then, upon the maturity date, the government pays you the full face value of the bill. The longer the maturity period, the greater your return.
One benefit to T-Bills is that they can be very short-term, with options starting at just four weeks.
And, as we have mentioned, investments in the federal government are extremely low risk. This means they are also low reward. But you can be sure that your money will be safe!
7. Cash Management Accounts
Potential rate of return: .01% - 5%
Estimated timeframe: unlimited
Risk level: Very low
Cash management accounts work like checking accounts from the investor's perspective. You can access your money at any time. The difference is that money held in a cash management account is being actively invested in a variety of short-term investment vehicles by “robo advisors” (virtual financial advisors that operate using artificial intelligence).
These ongoing investments help you to earn a bit of interest on the cash you’re keeping available. And, because the robo advisor understands that you can claim your cash at any time, it will only choose very low-risk investment options for you.
8. Money Market Accounts
Potential rate of return: .3% - 1.5%
Estimated timeframe: unlimited
Risk level: Very low
Money market accounts (MMAs) work like savings accounts, but with more restrictions. They typically require higher minimum investments than standard savings accounts, and they might have a minimum balance requirement as well.
Because of these additional restrictions, money market accounts typically offer slightly higher returns than savings accounts. But your money will remain just as secure since MMAs are also FDIC-insured.
9. Money Market Mutual Funds
Potential rate of return: 2% - 3%
Estimated timeframe: 6 months to 1 year
Risk level: Low
Money market mutual funds are not the same as money market accounts. Money market mutual funds are bundles of multiple short-term, low-risk securities (like the T-Bills and bonds we’ve discussed).
Because these securities are bundled into funds, you get the advantage of automatic diversification. However, unlike money market accounts, money market mutual funds are not FDIC-insured. So they come with slightly higher risk but also greater return potential.
10. Real Estate
Potential rate of return: 5% - 20%
Estimated timeframe: 6 months to 2+ years
Risk level: Low
Do you think of real estate as a long-term high-net-worth investing strategy? Traditional real estate investing required high upfront capital, making the investment feel risky, despite the long track record of stability in the real estate market. The fact is real estate is a low-risk investment, and the risk has gotten even lower since the JOBS Act of 2012.
The JOBS Act allowed investment companies to offer shares of real estate deals to the general public through a process called real estate crowdfunding. Crowdfunding pools funds from multiple investors to finance a single project. This means you can buy into a deal for a fraction of what it would cost to invest in direct property ownership. The less cash you have tied up in any given deal, the lower your risk level.
But what about the timeframes? How is real estate a short-term, liquid investment? Crowdfunding companies offer short-term real estate investments in the form of flips and developments!
Take a home flip, for example. A flip might only take 10-14 months. But most investors don’t have the capital, skill, time, or connections to pull off a successful flip. However, when you invest in a crowdfunded flip, you simply place your investment, then allow the project sponsor to handle everything from start to finish. And, when the project is sold, you collect your share of any proceeds!
These investments won’t be FDIC-insured, and you’ll need to commit to the project’s timeframe. But the return potential far exceeds any other low-risk short-term investment option on this list!
Take Advantage of Low-Risk Short-Term Real Estate Investing with Gatsby Investment
With our short-term flips and developments, you can potentially grow your money substantially in a low-risk environment. And with the experts at Gatsby handling the details of the deal for you, you don’t have to invest your time or sweat equity to enjoy the return potential of these real estate investments.
