Cash Investment Options: Exploring Safe And Smart Strategies

Cash investment options are short-term, low-risk, highly liquid financial instruments with a maturity period of fewer than 90 days or three months. They are suitable for investors who want to preserve their capital and need a temporary place to keep their cash while researching other investment products.

Examples of cash investment options include cash management accounts, money market funds, and certificates of deposit (CDs). These options tend to generate more modest returns than stocks or bonds but are a good way to keep your money safer and more accessible.

High-yield savings accounts

These accounts typically pay a much greater APY than traditional savings accounts, providing savers with the ability to earn more on their money while still enjoying the security of a federally insured account. Traditional savings accounts, by comparison, tend to yield close to nothing, often around 0.01% APY.

The best high-yield savings accounts have APYs that are about 10 times higher than the national average rate. Many of the rates offered by the best accounts top 4%.

When choosing a high-yield savings account, look for one that offers a competitive APY, has no monthly service fee, and provides access to your money when you need it. It is also important to note that, unlike with a certificate of deposit (CD), funds in a high-yield savings account are easily accessible.

• Capital One 360 Performance Savings Account
• EverBank Performance Savings Account
• Marcus by Goldman Sachs High-Yield Online Savings Account
• Varo Savings Account
• ETRADE Premium Savings Account
• UFB Portfolio Savings
• American Express High Yield Savings Account
• Laurel Road High Yield Savings
• Quontic Bank High Yield Savings
• SoFi Checking and Savings Account

Money market accounts

When choosing a money market account, it's important to consider the APY, check-writing privileges, and any fees that may be associated with the account. Some money market accounts have certain features that you won't find in a savings account, such as check-writing privileges and/or a debit card.

Overall, money market accounts provide a competitive yield, flexibility, and safety for your cash investments.

Cash management accounts

Each cash management account is unique, but they often provide easy access to funds in the form of a debit card and/or checkbook. These accounts typically sweep your cash into one or more accounts at partnering banks, where your money is eligible for Federal Deposit Insurance Corp. (FDIC) insurance. The FDIC insures each account up to $250,000, so by sweeping your cash into multiple accounts, all of your money can be insured. Your account provider will disclose which banks it partners with, although these may change over time.

Pros

• Simplified account ownership: CMAs can streamline your finances by allowing you to make transactions, earn high-yield interest, and sometimes use a credit line attached to your investment securities, all without having to transfer funds between different accounts.
• Above-average interest rates: Some cash management accounts have higher annual percentage yields than traditional bank savings accounts.
• Alternative to checking and savings accounts: Cash management accounts often come with features such as mobile check deposit, check writing, bill pay, money transfers, goal setting, and overdraft programs.
• Federal insurance: Your account is often insured by the FDIC or SIPC (Securities Investor Protection Corporation), which covers your investments and cash.

Cons

• Higher interest rates elsewhere: You might find higher interest rates with online savings accounts or by investing.
• Lack of face-to-face customer service: Like online banks, the non-bank financial service providers that offer CMAs tend to have remote customer service.
• Lack of certain features: Some cash management accounts don't have features like bill pay, which traditional checking accounts usually offer.
• May only be available online: Some cash management accounts are offered by online-only institutions.
• Not necessary for everyone: A key feature of a cash management account is the ability to insure funds in excess of the FDIC's typical $250,000 limit. However, most consumers don't have that much cash on hand, making this perk unnecessary.
• Fees and minimum balances: Some companies that offer cash management accounts charge monthly fees or require high minimum balances.

Some examples of cash management accounts include the Wealthfront Cash Account, Betterment Cash Reserve account, and the Fidelity Cash Management Account.

Short-term bond funds

Cash investment options are readily available short-term financial instruments with high liquidity, minimal market risk, and a short maturity period, usually less than three months.

Interest Rates and Yields

Time Horizon

Expense Ratios

When considering a short-term bond fund, pay special attention to the fund's expense ratio, or fee. A lower expense ratio is generally better, as fees eat into returns, and short-term bond funds naturally offer more modest returns.

Examples of Short-Term Bond Funds

• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
• Schwab 1-5 Year Corporate Bond ETF (SCHJ)
• Vanguard Short-Term Bond ETF (BSV)
• Fidelity Short-Term Bond Fund (FSHBX)

In summary, short-term bond funds can be a good option for investors seeking a conservative, low-risk investment with decent yields and easy liquidity.

Certificates of deposit

CDs are a safer and more conservative investment than stocks and bonds, but offer a lower opportunity for growth. They are also insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), so you won't lose money. The FDIC and NCUA insure bank and credit union accounts, respectively, for up to $250,000 per depositor, per bank.

CDs come in a variety of terms, from 3-, 6-, or 12-months to 4-, 5-, and even 10-year terms. The interest rate on a CD is usually fixed, though there are variable-rate CDs that could earn a higher return if rates rise. Generally, the longer the term, the higher the rate.

When you open a CD, you make one initial deposit that stays in the account until its maturity date. In return for giving up access to your funds, CDs generally pay higher interest rates than savings or money market accounts.

CDs can be a good idea if you have cash that you don't need now but will want within a few years. They can also be a good option if you want some of your savings invested conservatively, as they can help you achieve lower risk and volatility than investing in the stock and bond markets.

One downside of CDs is that your money is locked into the investment. However, this can be beneficial for savers who worry that they will be tempted to withdraw from their savings. The fixed term of a CD and the penalty for early withdrawal can deter spending.

CDs are available at most banks and credit unions, as well as through brokerage accounts.

Frequently asked questions