7 Short-Term Investment Options to Consider

Short-term investments are generally defined as investments that pay off in less than five years. Sometimes, they require even less time, perhaps only a year. These are very different from long-term investments, which are generally made with the goal of building wealth over time while preparing for retirement. Instead, short-term investments are typically used to build wealth much more quickly. Often, an investor is preparing for a specific goal, such as college tuition or a new home. Whatever the reason, short-term investments could be a lucrative addition to your portfolio when you choose the right investments.

A financial advisor can help you decide on short-term investment options for your financial plan.

Best Short-Term Investments to Consider

If you want returns sooner rather than later, these are some of the best short-term investments to consider.

1. Certificates of Deposit

A certificate of deposit (CD) is one of the safest short-term investments you can choose and is offered by most major banks.

You give a sum of money to the bank for a predetermined length of time, and at the end of that time period, you get back your principal plus interest at a predetermined rate. The longer the term of the CD, the higher the interest rate.

You can get a CD for a truly short period of time, sometimes as brief as one month, or you can select a CD with a longer term, lasting three or five years. If you are looking for an even longer investment, some CDs are available for as long as 10 years.

CDs are FDIC-insured, which significantly minimizes any risk involved. However, they do have lower returns than other types of investments. This makes them a good choice for investors who want to generate a small amount of wealth with very little risk required.

2. U.S. Treasury Notes

Buying Treasury notes from the United States government is another low-risk short-term investment option. Notes allow you to loan money to the federal government. An investor purchases the note and earns interest payments every six months until a predetermined maturity date. You can then cash out the note.

Notes have a relatively low return rate, generally earn an average interest rate of 3.048% based on a five-year period. Maturity dates can be two, three, five, seven or 10 years from the date of purchase. You can buy notes directly, or you can invest in a mutual fund or exchange-traded fund (ETF) that invests in notes.

Treasury notes are very low-risk. As long as you have faith that the United States government will not collapse, you are not taking any big risks.

3. Rewards Accounts

Many checking and savings accounts offer rewards based on how often you use your account or how much cash you store in it. If you find an account that gives you a good return, it is a solid short-term investment from which you can passively earn wealth.

The return is likely to be fairly small, so these are not likely enough to get you to your goal on their own. However, they can be a great way to make your money work for you, even that money is not actively invested.

4. Money Market Accounts

Money market accounts are similar to checking and savings accounts but often carry a higher interest rate. You can generally use a debit card or write a check, although limits may apply.

Money market accounts are a good way to earn interest without needing to think too much about your actual investing decisions. The risk involved is very low, as the FDIC insures money market accounts (but not money market mutual funds).

The potential return is not high with money market accounts, but it generally beats a normal checking account. Thus, a money market account makes sense for investors who want to earn some passive income without taking an active role in growing their portfolio.

5. Cash Back Credit Cards

There are a ton of credit cards out there that give cash-back rewards for customers’ spending. Some of them focus on types of spending, such as dining or travel, while others give more general cash back.

This is, again, a type of passive investment where you earn money and rewards on your everyday purchases. While this will not buy you a new house, you can use the cash back to fund moving costs, a vacation or another big purchase.

6. Stocks

Although it is risky to invest in stocks for the short term, there is the potential to make a big return. If you or your financial advisor see a stock that is due for a big bump in price, you can buy it and then sell it as soon as the price goes up to make a quick return.

This comes with a lot of risk. You could be wrong about the stock and instead see a big dip in price. This is always a risk with stocks, but the risk becomes even higher when you are counting on a quick turnaround.

Therefore, it is crucial to ensure you can take the potential loss before making a short-term stock investment.

7. Short-Term Bond Funds

Short-term bond funds are made up of mutual funds or exchange-traded funds (ETFs) that invest in fixed-income securities. Maturities typically range from one to three and a half years.

These funds are designed to offer relatively stable returns with lower interest rate risk compared to long-term bond funds, making them a practical option for investors seeking short-term income with slightly more yield potential than a standard savings account or CD.

These funds often include a mix of different types of bonds, including government, municipal and corporate bonds. Because they hold multiple securities, they provide built-in diversification, which can help manage risk.

However, it’s important to note that they’re not risk-free; short-term bond funds can still experience fluctuations in value, especially in rising interest rate environments or during market volatility.

That said, they generally yield more than savings accounts or money market products and can be a useful tool for conservative investors looking to generate modest returns while preserving capital.

Tax Considerations for Short-Term Investments

The IRS treats different types of investment income in different ways, which can impact your actual after-tax returns.

Interest earned from savings accounts, CDs, money market accounts and most short-term bond funds is typically taxed as ordinary income. That means it’s subject to your regular income tax rate, which could be as high as 37%, depending on your income level.

Profits from selling stocks or ETFs that you held for under a year are considered short-term capital gains. They are also taxed as ordinary income, whereas gains from assets held longer than one year benefit from lower long-term capital gains rates.

For tax efficiency, you might consider using a Roth IRA to hold certain short-term investments. While Roth IRAs are traditionally used for long-term growth, they can also be helpful for short-term savings goals if you qualify. Contributions (but not earnings) can be withdrawn at any time tax- and penalty-free, offering a flexible and tax-advantaged way to manage short-term savings.

Bottom Line

Short-term investments are a good way to generate wealth in a condensed time frame. They are sometimes riskier than long-term investments, although some options are considerably less risky than others. However, the lower-risk options tend to have a much lower rate of return. Still, all of these short-term investment options can help you build your portfolio. They can prove especially useful if you are looking to raise funds quickly for a specific purpose, like a new home or a honeymoon. Be sure to consider both risk and reward when making decisions about short-term investments.

Consider asking a financial advisor about the best investment strategy based on your short-term and long-term financial goals.

Investing Tips

Short-term investing, like all types of investing, can be confusing. A financial advisor can help you create a financial plan for your investment needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Asset allocation is an important part of all investing, no matter the time horizon. Use SmartAsset’s free asset allocation calculator to figure out how you should allot your money based on your personal financial situation.