What are the Best Short-Term Investments?

By Michelle Clardie on 03/25/2022.
Reviewed by Dan Gatsby .
Managing short-term investments is tricky; you want to maximize your returns, but you also need to keep your cash as safe as possible so it will still be there when you need it. And the safer an investment is, the less likely you are to get a good return. 

So what are your short-term investment options? What is the best way to invest your money in the short term to balance the risk and reward equation?

Let’s look at the factors that make for a good short-term investment. Then we’ll give you several good short-term investment options, followed by several better options, and, finally, our pick for the best short-term investment you can make.

What to Look for in Short-Term Investments?

Here are the metrics to consider when choosing the best short-term investment for you:

  • Low Risk. When you invest for a short period, you don’t have time to ride out any market disruptions. So you need to stick with comparatively low-risk options. 

  • Reasonable Liquidity. Perhaps you have a specific date within the next year or two when you’ll need to pull your cash out of your investment. Or perhaps you want to be able to draw funds from your investment as needed. Either way, you’ll want to pay attention to the accessibility of your capital. 

  • Low Cost. Switching between investments often incurs expenses. This isn’t much of an issue with long-term investments because the expenses will be a smaller percentage of profits. But when investing for the short term, your investments don’t have time to grow as much in value, so any fees take a larger percentage of your profits. 

  • Reasonable Yields. Short-term investments typically earn less than long-term investments, but you still want to see a fair return on your investment. At the very least, you want your investment to keep pace with inflation.  

With these criteria in mind, we have decided on the best short-term investments, categorized as good, better, andbest.

Good Short-Term Investments

You can’t go far wrong with these solid short-term investment options.

1. High-Yield Savings Accounts

High-yield savings accounts work just like traditional savings accounts, but with higher rates of return. You can still withdraw funds as needed from your account, although your bank or credit union might limit the amount you can withdraw or charge fees if the balance drops below the required minimum amount.      

Benefits of high-yield savings accounts:

  • There is minimal risk. If your account is held at a bank, your investment is secured by the Federal Deposit Insurance Corporation (FDIC), and if your account is held at a credit union, your investment is secured by the National Credit Union Administration (NCUA). So you can’t lose money. 
  • You’ll enjoy a high level of liquidity. You can access your funds at any time. 

The potential downside of high-yield savings accounts:

  • The term “high-yield” is misleading. You may get higher returns than a standard savings account, but compared to other investment options, the yields are actually quite low. Don’t expect your account to do much more than keep up with standard inflation rates.

2. Money Market Accounts

Money market accounts (MMAs) are a good alternative to savings accounts. While money market accounts are typically a bit more restrictive than savings accounts (requiring higher minimum investments and imposing more limits on withdrawals), they also typically provide higher returns. And, like with savings accounts, money market accounts are FDIC insured, so you can’t lose your money.  

Benefits of money market accounts: 

  • There is minimal risk since MMAs are FDIC-insured. 
  • They usually offer better rates of return than savings accounts. 
  • And they are still highly liquid, allowing you to access cash at any time (even if there are limitations on how much you can withdraw at once).

The potential downside of money market accounts:

  • The minimum investment amounts may be higher than savings accounts.
  • There may more restrictions on withdrawals. 
  • While the yields are usually better than savings accounts, they’re still lower than other short-term investment options.  

3. Treasury Bills

Treasury bills (T-bills) are short-term bonds, sold by the US Treasury. You buy bills at a discount (for example, buying a $1,000 bond for $975), and you receive the full amount of the bill on the maturity date. The sooner the maturity date, the lower your discount, so the lower your returns. Conversely, you can get better returns by choosing a maturity date further into the future. You can buy T-bills directly from the US Treasury Department or through a brokerage account.

Benefits of treasury bills: 

  • Minimal risk. While T-bills are not FDIC-insured, they are backed by the US government, making them as safe an investment as possible. 
  • The returns are often better with T-bills than with high-yield savings accounts or money market accounts.  

The potential downside of treasury bills:

  • You need to hold your bills until the maturity date, so they’re not as liquid as other short-term investments, but with flexible term options, you can set maturity dates for as little as a few days from the purchase date, so this may not be much of a downside.

4. Money Market Mutual Funds

Money market mutual funds are different from the money market accounts we’ve already discussed. Money market mutual funds are bundles of different short-term, low-risk securities (like T-bills, municipal and corporate debt, and bank debt). By bundling securities, you get the benefit of investing in several different investment types at once, providing instant diversification. If one of your securities performs poorly, the losses can be offset by the other securities in the fund.

Benefits of money market mutual funds:

  • Better returns than savings accounts or MMAs.
  • Automatic diversification.
  • Low-risk. The securities in the fund are low-risk by design.

The potential downside of money market mutual funds:

  • Management fees. Mutual funds are professionally managed by fund managers, so there are fees associated with the investment. But these fees are generally a low percentage of the amount in your fund.   
  • While the risk is low, it’s important to note that mutual funds are not insured by the FDIC or backed by the US government, so (while unlikely) it is possible to lose money with a money market mutual fund.

5. Short-Term Corporate Bond Funds

Similar to money market mutual funds, short-term corporate bond funds are comprised of multiple securities, giving you automatic diversification in your investment portfolio. Unlike money market mutual funds, corporate bond funds are made up solely of corporate bonds; there are no government bonds or T-bills in these funds. While this makes corporate bond funds a little riskier, it also improves the likelihood of earning higher returns. 

Benefits of short-term corporate bond funds:

  • Automatic diversification.
  • Potential for higher returns.  

The potential downside of short-term corporate bond funds:

  • Higher risk than securities that include government bonds or those that are FDIC-insured. You need to do your due diligence to find a corporate bond fund that you’re comfortable with. Some corporate bond funds are based on stable “blue-chip” corporations, while others include more volatile businesses.

Better Short-Term Investments

The next five short-term investments will take your portfolio to the next level in terms of return potential, liquidity, or both. 

1. Cash Management Accounts

Cash management accounts behave similarly to checking accounts, allowing you to access your money at any time, but while your money sits in the account, it is being actively invested by robo advisors (digital financial advisors built on artificial intelligence) in a variety of short-term investment vehicles like corporate bonds and money market funds. 

Benefits of cash management accounts:

  • Automatic diversification. 
  • High liquidity. Unlike money market accounts and high-yield savings accounts, cash management accounts typically don’t limit your withdrawals.
  • Low risk. The individual investments within your cash management account are all low-risk.  

The potential downside of cash management accounts:

  • With low-risk investments come low returns. 

2. Short-Term US Government Bond Funds

As the name implies, short-term US government bond funds are packages of multiple US government bonds.  

Benefits of short-term US government bond funds:

  • Automatic diversification.
  • Extremely low risk.
  • High liquidity. You can buy and sell bond funds on the stock market whenever the market is open.

The potential downside of short-term US government bond funds:

  • The low risk means limited potential for returns.

3. Municipal Bonds

Municipal bonds are similar to US government bonds, but instead of lending to the federal government, with municipal bonds, you’re lending to local city governments. While this is slightly riskier than lending to the federal government, it also means potential for better returns. More importantly, the interest you earn on municipal bonds is not subject to federal income tax. Depending on your state, it might also be exempt from state income tax as well.

Benefits of municipal bonds:

  • Income earned on municipal bonds is not taxable.
  • These bonds are low-risk since most local governments are stable and reliable. 

The potential downside of municipal bonds:

  • Lower liquidity compared to other options on this list of the best short-term investments. You might need to tie up your capital for around a year with municipal bonds.  
  • Higher return potential, particularly when you consider that none of your returns will be subject to federal taxation.

4. No-Penalty Certificates of Deposit

You may be familiar with certificates of deposit (CDs). These are a traditional way of lending money for a set period of time, then collecting your repayment plus the agreed-upon interest on the maturity date. While it has always been possible to cash out CDs before the maturity date if needed, early investment exits on traditional CDs were charged hefty penalties. 

With a no-penalty CD, you can cash out before the maturity date without paying a fee. 

Benefits of no-penalty certificates of deposit:

  • Very low risk. 
  • Improved liquidity, since penalties aren’t charged for early exits. 

The potential downside of no-penalty certificates of deposit:

5. Peer-to-Peer and Crowdfunding Loans

Peer-to-peer lending is when you act as the bank, lending cash to a private borrower. Crowdfunding is when you pool your cash with other investors to provide a loan to a private individual or small company. These types of investments are common in the real estate space. A real estate investor, for example, may need a peer-to-peer loan to fund the construction cost of a fix-and-flip project. You can lend the money to the investor, and collect your funds plus interest once the project is completed and the property is sold. 

Whether peer-to-peer or crowdfunding, your investment is only as good as your borrower. There is a risk of the borrower defaulting on the loan, causing you to lose your investment. But it’s more likely that the borrower will repay the loan. And, because this is a riskier investment, you can charge high interest rates.  

Benefits of peer-to-peer and crowdfunding loans:

  • Extremely high interest rate potential. 

The potential downside of peer-to-peer and crowdfunding loans:

  • Higher risk than any of the other options on this list of the best places to invest money in the short term. 
  • Lower liquidity than most other options. Your capital will be inaccessible until the borrower repays the loan. 

The Best Short-Term Investment

Our choice for the best short-term investment vehicle might surprise you… 

Real Estate Syndication

Real estate syndication is perhaps the best way to invest money for the short term. But because syndication has only recently been made available to the general public, it’s not widely known or understood.

Real estate syndication is when multiple investors join a syndicate company to finance a specific real estate project. The project can be anything from a quick house flip to a complex multi-family development. The syndication company is responsible for every detail of the deal, including structuring the ownership LLC, property acquisition, architectural design, construction/renovation, and selling (or property management in the case of long-term rentals).   

Real estate investments have always been seen as comparatively low-risk because they hold their values so well. But they’ve not traditionally been considered viable short-term investments because so few people have the knowledge and skill to successfully manage a flip or development on their own. Real estate syndication has made real estate a viable short-term investment!       

Benefits of real estate syndication:

  • Potential for extremely high returns. Annualized returns can top 20%.
  • Flexibility. With many different real estate projects available with varied time frames, there is an option to match your ideal investment time frame.
  • Control. You can choose which specific project(s) you want to invest in. 
  • Ownership of the underlying real estate. Unlike peer-to-peer loans or crowdfunding, syndication gives you ownership over real estate, which secures your investment. 

The potential downside of real estate syndication:

  • Higher risk than the low-return options on this list. 
  • Syndication investments are accessible only by accredited investors
  • Lower liquidity than the investment vehicles that allow you to access your capital at any time. But the liquidity of real estate syndication is far higher than the liquidity of traditional real estate investing.

Short-Term Investing with Gatsby Investment

If you’re going to invest in real estate syndication, it’s critical to note that your investment is only as good as your syndication company. With an inexperienced syndicate, this could be a risky investment. But with an established syndicate, like Gatsby Investment, which is full of industry experts, your investment is much safer.

Exceptional syndicates know how to maximize returns. Here at Gatsby, we’re regularly providing investors with 10-25% annualized returns. For comparison, the highest rate for a one-year CD in the past decade was right around 1%.  

With Gatsby, you also get:

  • Easy access to valuable real estate deals. Simply select your real estate investments through our user-friendly website. We’ll take care of the rest. 

  • Progress updates. Watch the advancement of your real estate project directly through your online portal.

  • Security. Gatsby is registered with the SEC.

  • Low minimum amounts. Imagine owning a piece of Los Angeles real estate for as little as $10,000.

  • The power to create passive income from real estate. Many of our short-term renovation projects can be continued into long-term rental projects if you decide you have more time to let your investment grow.  

If high return potential is important to you, make the most of your short-term investment with Gatsby. Sign up today!

Investment opportunities