How to Invest Your Short-Term Savings

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You’ve managed to save up a modest amount of money in your bank account over the last few years. Nice work! Now, with a few strategic decisions, you could make that money grow.

This post explores how to put your money to work on your behalf by making smart investment decisions.

First up: Why invest your short-term savings?

Investing your short-term savings may seem counterintuitive when considering investing can potentially tie up your money and prevent you from accessing it quickly, decreasing the speed of your liquidity. 

However, there are ways to invest your short-term savings so that you can still access your money when you need to. What’s more, investing your short-term savings could be one of the wisest financial decisions you make in life. 

With that in mind, let’s take a look at a few reasons why you should invest your short-term savings.

Extend your emergency savings 

By investing your money, you can put more aside to cover unexpected costs when they arise. Your car may break down, your refrigerator may fail, or you may lose your job. Building up a solid emergency fund should be one of your first financial goals.

Plan for healthcare costs

Sooner or later, you or someone in your family may require medical attention. Medical issues can be very costly, so it pays to have money stashed away with a financial institution to cover these kinds of costs.

Fund pre-retirement projects 

You never know where life may take you. You may want to start a family, buy a home, or launch a business, all of which require a lot of money. As savers can attest, it helps to have cash on hand to cover expensive undertakings.

The chances are likely that, if you’re investing, your money may be tied up in retirement accounts like traditional individual retirement accounts (IRAs), Roth IRAs, or 401(k) accounts. If so, you most likely won’t be able to access your money before age 59 ½ without paying penalties or taxes. 

So, if you want to prosper as an adult and not wait until retirement to enjoy life, you’ll need to build up a decent chunk of savings and allocate it effectively.

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Investing short-term savings: An overview

Now that it’s clear why you should be investing your short-term savings, here’s a step-by-step guide to getting started. 

1. Put six months of expenses into high-interest savings

The first thing you’ll want to do is set aside enough money to cover at least six months’ worth of emergency expenses. This will most likely involve transferring money from a traditional savings account to a higher interest-bearing account.

Everyone has different needs. As such, it’s essential to first determine how much money you’ll need to cover your costs for half a year.

You may be able to get by with as little as $12,000 if you live a bare-bones lifestyle. Or you may need to double or even triple this amount.

To complete this step, first you’ll need to understand your monthly budget. Make a list of your average monthly cash flow as well as your basic monthly expenses, including housing and utilities, food, and credit card or student loan bills. 

If you need assistance with forming a budget, head over to You Need a Budget

Where to put your emergency savings when starting a savings account 

High yield savings accounts

A high yield savings account (HYSA) is a type of savings account online banks offer. Online savings accounts usually offer much higher annual percentage yields (APYs) than traditional banks.

You can access your money any time through an HYSA without penalty. However, like all savings accounts, HYSAs are bound by Regulation D, a federal rule capping the monthly transactions you can make. Under Regulation D, you can only make six transactions during a billing cycle. 

Money market accounts

A money market account is an interest-bearing account offered by a credit union or bank. You’ll get a higher interest rate than a regular bank—similar to what you’ll find with an HYSA. However, unlike an HYSA, a money market account enables debit card access and check writing.

Certificates of deposit 

You may also want to take a small portion of your emergency savings and put it into a short-term certificate of deposit (CD) to lock in a fixed interest rate. Just don’t put too much in, in case you need to tap into your emergency savings. CDs come with term restrictions, which can be as short as 30 days or as long as several years. There may also be minimum deposit requirements to consider, too.

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Do you need six months of emergency savings? 

You may be tempted to skip over building an emergency fund and reduce your savings to three or four months’ worth. After all, racking up six months of emergency savings can be a tall order.

Before beginning to invest, you need to remember that saving is secure. Not only are savings accounts backed by the FDIC, but your savings also can’t rapidly decrease like your investment portfolio potentially could. Investing is essentially a safer form of gambling, and you may lose money regardless of how you spread your money around. 

If you’re on the fence about how much cash you should have on hand, your best bet is to talk with a financial advisor who can set you on the right course. 

2. Open a brokerage account 

Once you reach your target savings goal and you have enough put away in emergency savings, open a brokerage account from a leading broker like Schwab, Fidelity, Vanguard, or TD Ameritrade. 

Take your time when searching for a provider and look for one that offers minimal fees, a great trading experience, and a powerful mobile app. 

One thing to keep in mind is that most brokers offer no-commission trading. However, unless you’re day trading—which isn’t advised—you probably don’t have to worry about this too much. Most traders make less than 20 transactions per year in a brokerage account. 

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Brokerage accounts vs. retirement accounts

Once you find a broker that meets your needs, you’ll have to set up an account. At this stage, it’s critical that you set up a brokerage account and not a retirement account.

Accidentally selecting a retirement account will lock up whatever money you put into that account for retirement savings. If you want to access your money before retirement, go with a brokerage account instead. 

By doing so, you’ll pay annual taxes on capital gains or dividend distributions in addition to any foreign taxes or other fees. But your money will be liquid. This means you’ll be able to transfer any money not tied into an investment back into a checking account. Or you can sell stocks and then move money back to your checking account when you need to access it. 

3. Conduct a risk assessment

Before you transfer money into your brokerage account, it’s necessary to conduct a risk assessment.

The purpose of this exercise is to determine how much risk you are in a position to take on in your portfolio. 

If you’re young and you have many years left ahead to invest before retirement, you’ll most likely have a high risk tolerance, meaning you can absorb financial losses and let bad investments change course.

Those who are older and approaching retirement fall into a low-risk category, meaning they shouldn’t be taking as many chances. Older investors should instead be looking into other types of securities like bonds and CDs. 

Again, this is where it pays to have the help of a financial advisor to help make strategic investment decisions with you.

4. Invest

At this point, it’s time to move money into specific investments. Fund your brokerage account by linking your checking or savings account and go through the steps to put money into your account. 

Once the money is in your brokerage account, you’ll be able to browse the market and purchase individual investments.

Here’s a breakdown of where you should consider putting the bulk of your short-term savings.


Stocks are individual shares of publicly traded companies, which rise and fall in value throughout the day. You can purchase stocks directly through a broker.

As a disclaimer, the stock market is highly volatile. Spend some time learning how to read stock charts before you buy anything. 

You may also have better luck using automated robo-advisors or using an advisory service like The Motley Fool’s Stock Advisor for tips on great investments. 

Short-term bond funds 

Not all investors are comfortable putting the majority of their hard-earned savings into volatile stocks. 

A good way to diversify your portfolio is to invest in short-term bond funds, which are bonds—or debt instruments—that mature in less than five years. 

Short-term bond funds typically offer lower interest rates than long-term investment funds. However, they are generally pretty secure. 

Index funds

Another option is to put your money into index funds, which track market indexes like the S&P 500. 

Index funds are typically passively managed, meaning they don’t have a portfolio manager, making them less expensive than mutual funds. They are similar to exchange-traded funds (ETFs), many of which are also passively managed. 

For the best results, look for funds with low expense ratios, indicating the majority of your money is going towards growth as opposed to administrative fees. 

It’s also a good idea to read a fund’s prospectus so that you’re aware of any potential exit fees you may face when liquidating it. 

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5. Further diversify your portfolio

If you have any money left over, you should consider further diversifying your short-term investment portfolio with the following options. 

Real estate investment trusts (REITs)

Buying direct real estate and putting a down payment on a house or a building can be a big commitment. In some cases, it can tie up your money for many years. With homeowners insurance, property taxes, and mortgage interest added to the mix, it can also be very expensive. 

A safer and more affordable bet is to invest in REITs, or public companies that own and operate real estate. You can trade REITs just like stocks. By law, REITs are required to pay out the bulk of their income in dividends to retain REIT status.


If you have room for risk in your portfolio, consider looking into a site like Coinbase where you can buy Bitcoin.

Bitcoin, the leading cryptocurrency, is highly volatile. But many financial experts tend to agree that it has solid long-term value.

A cryptocurrency brokerage like Coinbase also gives you access to alternative coins, or altcoins, such as Ethereum and Litecoin. 

Frequently Asked Questions

Is a money market fund the same as a money market account?

A money market account is a type of secure deposit account offering high interest and the convenience of a debit card and check-writing capability. 

A money market fund is for investing. It’s a type of mutual fund that primarily invests in cash and cash equivalent securities.

Money market funds typically offer the potential for a higher return than money market accounts. However, they are riskier and make it harder to access your money. 

Are Treasury bonds good short-term investments?

Buying a Treasury bond from the federal government can be a good short-term investment as long as you purchase short-term treasury bonds. Some government bonds mature in a year or less, while others can take a long period of time to mature (e.g., up to 30 years). 

Know what you’re buying in advance to avoid locking your short-term savings up for too long.

Can you invest and save money at the same time?

It’s definitely possible to invest and save money at the same time. All you have to do is set up the appropriate accounts and fund them regularly. You’ll need separate savings accounts and investment accounts to do this.

Most investors should invest and save at the same time to achieve growth while minimizing risk.

Is an IRA good for short-term savings?

An IRA is not for short-term savings. An IRA is for long-term, tax-advantaged retirement savings. Putting your money into an IRA will tie your money up for decades. 

You can still access your IRA money early for certain qualified expenses without paying penalties. But—assuming you don’t have a Roth IRA—you’ll need to pay taxes on your funds.

The Bottom Line

When it boils down to it, there are many investment options to consider for your short-term savings.

Spend some time thinking about your investment time frame and outlining your short-term goals. Determine where you want to be in two years, five years, and ten years and make investments that can help you get there. 

Once you have a short-term investment plan in place, it’s time to take a step back and focus on building a long-term retirement strategy. Do that and you’ll be well on your way to long-term financial independence.

Additional Disclosures: Millennial Money has partnered with CardRatings and for our coverage of credit card products. Millennial Money, CardRatings and may receive a commission from card issuers. This site does not include all financial companies or financial offers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

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