People usually think of investing as a long-term strategy, but there are also opportunities to grow your money in the short term. Whether you’re saving for a down payment on a house, planning a vacation, or simply looking to maximize your savings, short-term investing can help you achieve your financial goals within a few months to a few years. However, short-term investing comes with its own set of risks and considerations. Here’s what you need to know about short-term investing.

1. Understand the time frame

Short-term investing typically refers to investments with a time horizon of less than five years. Because of the shorter time frame, the focus is often on preserving capital while earning modest returns. The key is to find investments that provide a balance between safety and growth, allowing you to access your money when you need it.

Tip: Clearly define your investment time frame before choosing where to put your money. Knowing your timeline will help you select the right type of investment.

2. Assess your risk tolerance

Short-term investments generally offer lower risk than long-term investments, but they still carry some level of risk. Market fluctuations can impact your returns, and with a shorter time frame, there’s less time to recover from losses. It’s important to assess your risk tolerance and choose investments that match your comfort level.

Tip: If you’re risk-averse, consider safer options like high-yield savings accounts or certificates of deposit (CDs). If you’re willing to take on more risk for potentially higher returns, you might explore short-term bond funds or money market funds.

3. Explore different investment options

There are several types of investments that can be suitable for short-term goals. Here are a few options to consider:

  • High-yield savings accounts: These accounts offer higher interest rates than traditional savings accounts and are a safe place to park your money with easy access when needed.
  • Certificates of deposit (CDs): CDs are time deposits with a fixed interest rate for a set period. They’re low-risk but require you to lock in your money for the term of the CD, which can range from a few months to several years.
  • Money market accounts: These accounts offer higher interest rates than regular savings accounts and often come with check-writing privileges. They’re a good option for short-term savings with some level of liquidity.
  • Short-term bond funds: These funds invest in bonds with shorter maturities, typically less than three years. They offer higher returns than savings accounts but come with more risk due to interest rate fluctuations.
  • Peer-to-peer lending: Platforms like LendingClub or Prosper allow you to lend money to individuals or small businesses in exchange for interest payments. While this can offer higher returns, it also comes with higher risk.

Tip: diversify your short-term investments across different options to spread risk and potentially enhance returns.

4. Consider the impact of taxes

Taxes can have a significant impact on your short-term investment returns. Interest earned on savings accounts, CDs, and money market accounts is generally taxable as ordinary income. Capital gains from the sale of investments held for less than a year are also taxed at your ordinary income tax rate, which can be higher than the long-term capital gains tax rate.

Tip: Be mindful of the tax implications of your short-term investments. Consider tax-advantaged accounts, like a Roth IRA, if you’re eligible, to potentially reduce your tax burden.

5. Stay liquid and flexible

One of the main advantages of short-term investments is liquidity—the ability to quickly convert your investment into cash. When choosing short-term investments, prioritize options that allow you to access your money without significant penalties or delays.

Tip: Avoid tying up all your funds in investments that have early withdrawal penalties or lock-in periods, especially if you might need the money on short notice.

6. Monitor your investments

Short-term investments require more active monitoring than long-term investments. Since your time horizon is shorter, you’ll need to keep a closer eye on market conditions and your investment performance. Regularly review your portfolio and be prepared to make adjustments if necessary.

Tip: Set up alerts or check-ins to track your investments and ensure they’re on track to meet your goals. Don’t hesitate to rebalance your portfolio if market conditions change.

7. Have a clear exit strategy

Before you invest, it’s important to have a clear plan for when and how you’ll access your money. Consider the timing of your withdrawals, any potential fees, and the current market conditions. An exit strategy ensures that you’re able to cash out your investments when you need them without unnecessary losses.

Tip: Plan your exit strategy around your financial goals. For example, if you’re saving for a large purchase, align your investment withdrawals with your planned purchase date.