Two to three years is an awkward time frame for financial planning. It isn't really enough time to invest safely in the stock market--although that doesn't prevent some of us from trying. But it's too long to let cash languish in a checking account earning little or no interest. If you've got money earmarked for a specific purpose in the next couple of years, you're probably wondering if you can invest it safely and still get a decent return.

That's a question we tackled in the Consumer Reports Money Lab. We discovered a savings strategy that takes a little extra effort and carries a tad more risk but will almost always leave you better off than simply plopping your cash into a money-market fund or CDs at your local bank. Before describing our results, let's examine the usual suspects for short-term savings: CDs and money-market funds.


The trouble with CDs

If you know when the money will be needed--your kid starts college a year from September, say, or the new baby is arriving in December--you might pick a CD that matures on or near that date. Banks typically offer a CD menu with half-year gradations up to 2½ years. As long as 1- and 2-year CD yields are in the 4.0 to 5.3 percent range, you're getting some return for your money and it's super safe--just keep the amount in any one institution within the limits guaranteed by the FDIC. (They're $100,000 maximum for individuals and $250,000 for an IRA, but you can increase the limits using joint accounts and trusts, etc.) However, if interest rates go higher in a few months, you will miss out on a better return because you're locked into the CD.

On the other hand, if you don't know when you'll be using the money--or if you'll need to take it out in increments over time--then a CD might be troublesome. Most banks charge a penalty for premature withdrawals. Also, if you have to keep the money on deposit longer than you estimated, there might not be a good yield available when the CD matures.

That's why most people use money-market funds as a holding pen for their short-term cash. For instance, you may be saving for a down payment on a house but not know how long you'll be shopping for the right place or how long you'll have to wait to close on it. The big advantage of a money-market fund is that it's liquid, which is just an economist's fancy way of saying that you can get the money any day you want with a phone call or by writing a check.

Unfortunately, when interest rates fall, your money fund's yield will too. Average yields dropped below 1 percent in the last recession, which meant that money-fund investors were losing ground to inflation for three years.