How To Find High-yield Short-term Investments

Making Your Money Work for You: A Casual Guide to Short-Term investments with Good Returns

Let’s face it: we all want our money to grow, not just sit there gathering dust. While long-term investments like a 401(k) or a Roth IRA are essential for retirement, what about the money you’ll need in the near future? Maybe you’re saving for a down payment on a house, a new car, or that dream vacation. That’s where short-term investments come in. They’re all about making your money work for you over a shorter period, usually less than a year. The key is to find options that offer good returns without putting your cash at too much risk.

In this guide, we’ll break down the world of short-term investments in simple, no-jargon language. We’ll explore some of the best options out there for good returns, explain how they work, and help you figure out which ones might be right for you. We’ll cover everything from high-yield savings accounts to more advanced options like short-term bond funds, giving you a comprehensive overview to help you make smart choices.

The Basics: What Even Is a Short-Term Investment?

Before we dive into the specifics, let’s get on the same page. A short-term investment is any financial move you make with the expectation of converting it back to cash relatively quickly, often within a year. Think of it as a place to park your money where it can earn a little extra cash, but you can still access it when you need it.

The main difference between short-term and long-term investing comes down to two things: liquidity and risk.

Liquidity is just a fancy word for how easily and quickly you can turn an asset into cash without losing a lot of its value. A short-term investment needs to be very liquid. You can’t have your money tied up for ages if you need it for a down payment in six months.

Risk is the chance that you’ll lose money on your investment. With short-term investments, the goal is to protect your capital. You’re not looking to hit a home run; you’re looking to score a single or a double. This means these investments are generally much safer than, say, putting all your money in a volatile stock.

So, in a nutshell, we’re looking for investments that are safe, easy to get your hands on, and offer a better return than just a regular old checking or savings account.

The Top Contenders: Short-Term Investments with Good Returns

When it comes to finding a good home for your short-term cash, you have a few solid options. Each one has its own pros and cons, so the best choice for you depends on how much risk you’re comfortable with and how soon you’ll need the money.

# High-Yield Savings Accounts (HYSAs)

Let’s start with the easiest and safest option: a high-yield savings account. This is exactly what it sounds like—a savings account that pays a much higher interest rate than what you’d get at a traditional bank. The “high-yield” part comes from the fact that most of these accounts are offered by online-only banks. They don’t have the overhead costs of physical branches, so they can pass those savings on to you in the form of better interest rates.

The Good Stuff: These accounts are super safe because they’re typically FDIC-insured, meaning your money is protected up to $250,000. They’re also incredibly liquid. You can transfer money in and out whenever you want, though there might be a limit on the number of transfers you can make per month. Plus, they’re completely predictable; the interest rate is what it is, and you know exactly what you’ll earn.

The Not-So-Good Stuff: While the returns are “high” compared to a regular savings account, they’re still relatively modest. Don’t expect to get rich quick with an HYSA. The rates can also fluctuate with the overall economy, so they’re not locked in for a set period.

# Certificates of Deposit (CDs)

If you have money you know you won’t need for a specific period, a certificate of deposit (CD) might be a great fit. A CD is like a savings account with a lock on it. You agree to keep your money at the bank for a set term—anywhere from a few months to several years—and in return, the bank gives you a fixed interest rate, which is often higher than a regular savings account.

The Good Stuff: The main advantage of a CD is the fixed interest rate. You’re locking in a specific return, so you don’t have to worry about rates dropping. They’re also FDIC-insured, making them a very safe choice.

The Not-So-Good Stuff: The big drawback is the lack of liquidity. If you need to pull your money out before the term is up, you’ll likely pay an early withdrawal penalty, which could eat into your returns. This makes CDs best for money you’re 100% sure you won’t need for the duration of the term.

A cool strategy many people use is a CD ladder. This is where you split your money and invest it in several CDs with different maturity dates. For example, you could put a third of your money in a one-year CD, a third in a two-year CD, and the rest in a three-year CD. As each one matures, you can either use the cash or reinvest it in a new, long-term CD. This gives you regular access to your money while still getting the higher rates of a longer-term CD.

# Money Market Accounts (MMAs)

Don’t confuse a money market account with a money market fund (we’ll get to that next). An MMA is another type of savings account offered by a bank. They usually offer a slightly better interest rate than a traditional savings account and often come with some checking account features, like a debit card or the ability to write a few checks per month.

The Good Stuff: Like HYSAs and CDs, MMAs are FDIC-insured and generally very safe. They offer a bit more flexibility than a CD because you can access your money more easily, and the interest rates are often competitive.

The Not-So-Good Stuff: They often have higher minimum balance requirements than HYSAs, and if your balance dips below that minimum, you might get hit with fees. The interest rates can also change, so they’re not locked in like a CD.

# Money Market Funds (MMFs)

A money market fund is a bit different from the other options we’ve discussed so far because it’s technically a type of mutual fund. It’s a pooled investment where a bunch of people’s money is used to buy low-risk, highly liquid securities like U.S. Treasury bills and commercial paper.

The Good Stuff: MMFs often offer a better return than a high-yield savings account. They’re also highly liquid, and you can usually buy and sell shares easily through a brokerage account. They’re generally considered very safe, though they are not FDIC-insured.

The Not-So-Good Stuff: Because they’re not FDIC-insured, there’s a very small chance (though historically rare) that you could lose a tiny bit of money. The returns aren’t guaranteed and can go up and down.

# Short-Term Corporate and Government Bond Funds

For those who want to dip their toes into a little more risk for potentially better returns, short-term bond funds are an option. A bond fund is a mutual fund that invests in a collection of bonds. Short-term bond funds specifically hold bonds that will mature in a short period, typically one to three years.

The Good Stuff: Bond funds can offer a higher return than a high-yield savings account or a money market fund, and they can be a great way to diversify your portfolio. They are also highly liquid, as you can buy and sell them through a brokerage.

The Not-So-Good Stuff: This is where we start introducing a little more risk. While bonds are generally considered safer than stocks, they’re not risk-free. The value of the fund can go down, especially if interest rates rise. Short-term corporate bond funds carry more risk than short-term government bond funds because corporate bonds have a higher chance of default.

How to Choose the Right Short-Term Investment for You

With all these options, how do you decide what’s best? It really comes down to three things: your timeline, your risk tolerance, and your goal.

# Your Timeline

First, think about when you’ll need the money.

Less than a year? An HYSA or a money market account is probably your best bet. They offer easy access and low risk.

One to three years? A CD ladder could be a great choice. You’ll get a better, locked-in rate without having all your money tied up for too long.

Three to five years? This is where you might start considering short-term bond funds. The slightly longer timeline gives you more time to ride out any small market fluctuations.

# Your Risk Tolerance

How comfortable are you with the possibility of losing a little bit of money?

Zero risk tolerance? Stick with FDIC-insured options like an HYSA, MMA, or CDs. Your principal is protected, period.

Willing to take on a little risk? A money market fund or a short-term government bond fund could work. The risk is very low, but not zero.

Okay with a bit more volatility? Consider a short-term corporate bond fund. The returns could be better, but the risk of loss is also higher.

# Your Goal

What are you saving for?

Emergency fund? This money needs to be immediately accessible and completely safe. A high-yield savings account is the classic choice here.

Down payment on a house? A CD ladder could be perfect for this. You’ll likely have a specific time frame (e.g., three years until you buy), and a CD will give you a guaranteed return during that time.

Saving for a big purchase? A money market account or a money market fund could be a good choice. You get a decent return and can access the money with relative ease when you’re ready to buy.

Common Questions and Important Considerations

Navigating the world of short-term investments can lead to a few questions. Here are some of the most common ones.

# What about stocks? Are they a short-term investment?

Generally, no. Stocks are not a good short-term investment. The stock market is notoriously volatile. While you could make a quick profit, you could just as easily lose a significant portion of your money in a short period. Short-term investing is about capital preservation, and stocks are just too unpredictable for that purpose. You invest in stocks for the long haul, where you have time to recover from market downturns.

# What about crypto?

Same answer as stocks, but even more so. Cryptocurrency is an extremely high-risk, volatile asset. Its value can swing wildly from one day to the next. You should never, ever put money you need in the short term into crypto. It’s a speculative investment, not a safe place to park your cash.

# How do I start?

Getting started is actually pretty simple.

1. Open an account. This could be a high-yield savings account at an online bank or a brokerage account to access money market funds and bond funds.
2. Fund it. Transfer the money you want to invest from your checking account.
3. Set it and forget it (mostly). The beauty of these options is that they don’t require a lot of active management. Just let the money grow until you need it.

# Why is inflation important?

Inflation is the rate at which the cost of goods and services is rising. If the return on your investment is lower than the rate of inflation, you’re actually losing purchasing power. For example, if inflation is 3% and your savings account only pays 1% interest, the money you have will buy less a year from now. This is a key reason why it’s important to find short-term investments with good returns—you want to at least keep up with inflation to protect the value of your money.

Putting It All Together: A Final Word of Advice

Short-term investing isn’t about getting rich; it’s about being smart with your money. It’s the middle ground between keeping your cash in a low-earning checking account and taking on the long-term risks of the stock market. By choosing the right option for your situation, you can ensure your money is working for you, even for a short period.

Remember, the goal is to find a balance between a good return and the safety and liquidity you need. Start with the safest options and only move to riskier ones if you’re truly comfortable with the potential for small losses. As always, do your research, read the fine print, and make sure you understand exactly how your chosen investment works. Your future self (and your wallet) will thank you for it!