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If you’re starting to invest or refining your strategies, there are many options available based on your financial goals, risk tolerance and investment timeline. Common investments could range from safe, traditional savings accounts and CDs to riskier stocks, bonds and mutual funds. Each investment carries specific benefits and drawbacks. So diversifying your portfolio across these options can reduce risk and potentially increase your returns.
If you need help deciding on investments, a financial advisor can analyze options with you and manage risk for your portfolio.
When choosing how to invest your cash, consider your financial goals, risk tolerance and liquidity needs. Savings accounts can be good for safety and quick access to your money. CDs could provide higher returns if you’re okay with locking up your funds for a specified time. Money market funds strike a balance between yields and easy access to funds. Cash management accounts give you convenience and flexibility, while short-term bonds offer a bit more return with low risk. Here’s a deeper breakdown of each.
Savings accounts are considered a safe option for investing cash. Available through banks and credit unions, these accounts allow you to earn interest while keeping your money accessible. Even though the interest rates on savings accounts are usually lower when compared with other investments, they offer high liquidity, which means you can withdraw your money anytime without facing penalties.
Additionally, savings accounts are low-risk because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. This makes them an excellent choice for anyone looking to protect their emergency funds or save for short-term financial goals.
Certificates of Deposit (CDs) are time deposits offered by banks that pay a fixed interest rate for a specified term. Terms can range from a few months to several years. In exchange for agreeing to leave your money in the account for the term’s duration, you typically receive a higher interest rate when compared with regular savings accounts.
But, you should note, accessing your money before the CD matures often incurs a penalty. CDs are also FDIC-insured, providing a secure investment. They are ideal for investors who do not need immediate access to their cash and want a predictable return over a fixed period.
Money market funds are a type of mutual fund that invests in short-term, high-quality debt securities, such as Treasury bills and commercial paper. These funds aim to offer higher yields than traditional savings accounts while maintaining a high degree of liquidity.
Although not FDIC-insured, money market funds are generally considered low-risk because they invest in stable, short-term instruments. They are managed by professional fund managers who strive to keep the fund’s net asset value (NAV) at $1 per share. Money market funds can be a suitable option for investors seeking a slightly higher return on their cash while still prioritizing safety and liquidity.
Take note: Don’t confuse money market funds with money market accounts (MMAs). MMAs are a type of deposit account that combine features of both checking and savings accounts. They typically don’t earn as much as a money market fund, and they’re offered by banks and credit unions, not brokerages.
Cash management accounts (CMAs) combine features of savings accounts, checking accounts and investment accounts into one product. Offered by financial institutions and investment firms, CMAs provide a higher interest rate on deposits compared to traditional savings accounts. They also offer easy access to your funds through checks, debit cards and electronic transfers.
CMAs are not always FDIC-insured, but many are protected through the Securities Investor Protection Corporation (SIPC) up to certain limits. These accounts are ideal for individuals who want to manage their cash conveniently while earning competitive interest rates and maintaining flexibility in accessing their funds.
Short-term bonds are debt securities that mature in one to three years. They can be issued by governments, municipalities or corporations. These bonds typically offer higher yields than savings accounts or CDs, but come with slightly higher risk. The principal is repaid at maturity, and interest payments are usually made semi-annually.
Government-issued short-term bonds, such as Treasury notes, are considered very safe, while corporate short-term bonds may carry more risk but potentially offer higher returns. Short-term bonds can be a good option for investors looking to earn more interest than a savings account while still preserving capital over a relatively short time frame.
When deciding how to invest your cash, here are four general factors to keep in mind:
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Minimum balance requirements: Many savings accounts and CDs have minimum balance requirements to avoid fees or to qualify for the highest interest rates. Knowing these requirements can help you avoid unnecessary costs and make your cash work as efficiently as possible.
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Liquidity: Liquidity refers to how quickly you can convert an investment into cash without significantly affecting its value. For those who may need quick access to their funds, highly liquid options such as savings accounts, money market funds or short-term certificates of deposit (CDs) are advisable. These instruments offer flexibility, allowing investors to withdraw their cash when needed with minimal penalties or loss of interest.
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Insurance: One of the key aspects of cash investments is ensuring the safety of your principal. Federal Deposit Insurance Corporation (FDIC) coverage provides a safety net by insuring deposits up to $250,000 per account holder, per institution. It guarantees that even if the financial institution fails, your investment is protected.
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Interest rates: Interest rates on cash investments can be variable, impacting the returns on your investment. High-yield savings accounts and money market funds often have variable rates that can fluctuate based on market conditions, while most CD rates are fixed for the length of their term. Monitoring economic conditions and understanding how interest rate changes may affect your cash investment can help you adjust your strategy accordingly.
Knowing how to invest cash effectively is key to securing your financial future. Cash investments like savings accounts, money market funds and short-term bonds might not yield as high returns as other options, but they are important for reducing risk and building up funds. By diversifying your cash investments among these options, you can strike a good balance between risk and return. Keeping up with rate changes and requirement changes, as well as different financial trends, will also help you choose where to put your cash to maximize opportunities.
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If you need help figuring out where to invest your cash, a financial advisor has the expertise to help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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.
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Cash investments are just one slice of your overall portfolio, and the amount you should keep in cash investments depends on your age, goals and financial situation. If you’re not sure how much money you should have in cash investments, learn how to manage your portfolio’s asset allocation.
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