Best short-term investments for 2023 (2024)

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With inflation slowing after a series of rate hikes by the Federal Reserve, you may be looking for strategies to reduce risk and grow your wealth more safely.

In this guide, we’ll explore the best short-term investments for 2023 and discuss how to work on boosting your returns while minimizing risk. With the right strategy, you can take steps to help build a strong financial foundation in the coming year. But first, let’s go over what short-term investments are and how to choose the right ones for your situation.

• What are short-term investments?
• For quick access: Money market accounts
• For storing money: High-yield savings accounts
• For diversification: Corporate bonds
• For extra security: Government bonds
• For hedging against inflation: Treasury inflation-protected securities
• For a higher yield: Certificates of deposit
• For low-risk gains: Cash management accounts

What are short-term investments?

Short-term investments are holdings that you can easily convert into cash — typically within a year or so. They’re a good way to diversify your portfolio and ensure that your returns can be liquidated quickly.

Because you can move your money around more easily, lower risk cash investments could be the right strategy for short-term financial goals

How to spot good short-term investments

Image: Best-short-term-investments

When deciding the best short-term investments for your situation, consider the potential return on investment (or ROI), the liquidity of the investment and the fees associated with it. Ideally, transaction costs should be low, and you should be able to quickly access your money.

ROI is a metric that reports how much profit you stand to gain from an investment. A good ROI is generally considered to be about 5% to 7% per year. The average annual return of the S&P 500 is about 10% a year.

For a clearer estimate of your potential returns, you can use this free ROI calculator.

Once you have an idea of what your returns will look like, look into the company or investment product and assess its track record and any recent news or events that could affect its performance. These factors will influence your investment’s performance, so prioritize assets that are stable and have predictable growth.

Additionally, consider the volatility of the investment and the amount of risk you are willing to take on. Finally, diversify your investments and avoid putting all of your eggs in one basket.

Now that you know what short-term investments are and how to pick one, let’s explore some of the options to choose from.

Which short-term investment is best for you?

For quick access: Money market accounts

Investing factors: High liquidity, low transaction costs, predictable and low-risk

Money market accounts are a type of deposit account that offer higher interest rates than traditional savings accounts. They are typically available at banks, credit unions and other financial institutions. These offer the same liquidity as regular savings accounts but with a higher rate of return.

As with every high-interest option, there’s a catch. The minimum balance requirement is significantly higher with money market accounts vs. savings accounts, usually starting around $500, with some going up the thousands. These accounts usually restrict the number of transactions you can make by check, debit card or electronic transfer.

They are a great option for those looking to save more money while also earning a higher return on their investments. Money market accounts are also NCUA- or FDIC-insured up to $250,000 held by the same owner or owners., meaning your funds are safe and secure if the credit union or bank fails.

For storing money: High-yield savings accounts

Investing factors: High liquidity, low transaction costs, predictable and low-risk

High-yield savings accounts are a great way to save money and earn interest. They offer higher interest rates than traditional savings accounts.

Plus, banks usually pay interest monthly so you can reap the benefits sooner than later. High-yield savings accounts also have fewer fees and restrictions than other types of accounts, making it easier to access your money when you need it. In addition, these accounts are FDIC-insured, so your money is safe and secure.

The interest rates on high-yield savings accounts can vary, so it’s important to shop around and compare different banks to find the best rate. These landed on our best short-term investments list because you can rest assured that your money is growing and earning more cash for you than a regular savings account.

For diversification: Corporate bonds

Investing factors: Low transaction cost and predictable

Corporate bonds are a form of debt security issued by companies to raise funds for their operations. They are essentially loans that investors make to the company, with the company promising to pay back the loan with interest. Investors find corporate bonds attractive because they typically offer higher yields than government or municipal bonds. But those higher yields can come with greater risk.

Additionally, these investments pose less risk than traditional stocks since the issuing company’s assets back them. They have regular interest intervals but no FDIC insurance, which means you can lose money if the issuing company goes under.

Corporate bonds are available in several maturities, from short-term to long-term. Investors should always research the company issuing the bond to ensure it is financially sound before investing. Corporate bonds can be a great way to diversify a portfolio and earn higher returns than other fixed-income investments.

For extra security: Government bonds

Investing factors: Low transaction costs, predictable and low-risk

Government bonds are debt securities issued by a government to raise money for various purposes. These bonds typically come with a fixed interest rate and maturity date and they can be bought and sold in the secondary market.

Many consider government bonds to be a safe investment because they have the full faith, backing and credit of the government. They’re similar to corporate bonds, except U.S. government agencies issue them.

They are also attractive to investors because they provide a steady stream of income in the form of interest payments. Governments use government bonds to finance infrastructure projects, pay off debt and fund other government programs.

For hedging against inflation: Treasury Inflation-Protected Securities

Investing factors: Low transaction costs, predictable and low-risk

Treasury Inflation-Protected Securities (or TIPS) are a type of bond issued by the U.S. Treasury Department, and they’re perfect for investors who want to protect their savings from inflation. These bonds are indexed to the Consumer Price Index, so the principal of the bond increases and decreases with inflation. TIPS also pay a fixed rate of interest twice a year, which is adjusted for inflation.

TIPS make an attractive investment for those looking for a safe and reliable way to preserve their purchasing power.

Generally, TIPS pose little risk since they’re fully backed by the U.S. government. They also offer investors the ability to diversify their portfolio, adding another layer to their low-risk status.

For a higher yield: Certificates of deposit

Investing factors: High liquidity, low transaction costs, predictable and low risk

A certificate of deposit (or CD) is a type of savings account that typically offers a higher rate of return than a traditional savings account. CDs are typically offered by banks and credit unions and require a minimum deposit amount.

They’re similar to a regular savings account, except the bank pays a higher interest rate. The trade-off is that you agree to let them hold your money for a specific amount of time. You’ll also have to pay a penalty if you want to withdraw money before this holding period is over.

Alternatively, you can opt for a no-penalty CD. You won’t pay a fee for moving your money before the CD matures, but interest rates are lower.

CDs usually have a fixed interest rate, so the amount of interest earned is known from the start. The term of the CD can range from a few months to several years, and the interest earned is typically paid at maturity. CDs are a low-risk investment, as the principal is NCUA- and FDIC-insured up to $250,000.

For low-risk gains: Cash management accounts

Investing factors: High liquidity, low transaction costs, predictable and low risk

Cash management accounts are a financial product that combines the features of checking and savings accounts. They typically offer higher interest rates than traditional checking and savings accounts, as well as online bill pay, automatic transfers and access to a debit card.

These accounts are extremely liquid, so you can access your funds anytime and move them around to maximize your earnings.

Cash management accounts can save time and money by consolidating transitions and tracking spending to help you stay on budget. They’re an excellent choice for those looking for a convenient and cost-effective way to manage their finances.

What’s next: Investing for the short term

Finding the best short-term investments can help you boost your finances while minimizing risk. By focusing on safety, you can access your cash when you need it and avoid the risk of losing money on a potentially risky investment.

Sourcing

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• Crypto volatility. Explaining crypto’s volatility (December 2021)
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