Life in the Cash Lane

Growing up my father would often say “cash is king” as he handed over bills to the cashier while I rolled my eyes upon hearing this saying for the millionth time. But now as a financial advisor, I understand the importance of cash and that making strategic decisions about where to earn a little extra return on your short-term savings and emergency fund is crucial for maintaining and growing wealth.

If you are looking for more information about how much cash you should have on hand for day-to-day expenses, short term goals, and your emergency fund please listen to our Your Money in 20 podcast episode 26 titled All About Cash!

Some key considerations for investing this stockpile are liquidity, risk, and short-term returns. So, let’s explore various investment options ranked by liquidity to help you make informed decisions that align with your financial goals.

High-Interest Savings Accounts:

For those who prioritize liquidity above all else, high-interest savings accounts are an excellent starting point. These accounts offer competitive interest rates while allowing easy access to your funds. Most traditional banks and online financial institutions provide these accounts, making them a convenient choice for short-term parking of excess cash. Online banks often provide higher yields compared to traditional brick-and-mortar institutions. Also ensure the institution is FDIC-insured for added security. Current rates for high-interest savings accounts are approximately 4-5%.

Money Market Accounts:

Money market accounts (MMAs) offer a step up in terms of yield compared to regular savings accounts. These accounts invest in highly liquid, low-risk instruments such as government securities, certificates of deposit, and high-quality corporate bonds. While they might have slightly higher minimum balance requirements, MMAs maintain a high level of liquidity, allowing you to easily withdraw funds when you need them. Current rates for high-interest money market accounts are approximately 4-5%.

Certificates of Deposit (CDs):

Certificates of Deposit are time deposits that offer fixed interest rates for a specified term, ranging from a few months to several years. CDs may provide higher interest rates than savings and money market accounts but come with a trade-off in terms of liquidity. Early withdrawal typically incurs interest penalties, so it's essential to carefully consider the investment horizon before committing to a CD. Current rates for 1-year CDs are approximately 5%.

Treasury Bills (T-Bills):

U.S. Treasury Bills are short-term government securities with maturities ranging from a few days to one year. They are considered one of the safest investments due to the backing of the U.S. government. T-Bills are sold at a discount and mature at their face value, with the difference representing the interest earned. They can be purchased directly from the U.S. Department of the Treasury or through a broker. The yields might be lower than riskier investments, but the security and liquidity make them an attractive option for short-term holdings. Current rates for 1-yr T-Bills are approximately 5.1%.

Ultra-Short-Term Bond Funds:

For a slightly more dynamic approach, ultra-short-term bond funds invest in short-duration fixed-income securities. While these funds may carry slightly more risk than traditional savings options, they still offer relative stability. Ensure you understand the fund's investment strategy and risk profile before investing. Current yields for these types of bond funds are between 3-6%.

Short-Term Municipal Bond Funds:

Municipal bonds are issued by local governments and are known for their tax advantages. Short-term municipal bond funds invest in bonds with maturities of one to three years, providing a blend of safety and potential tax benefits. Be sure to investigate the credit quality of the bonds held in the fund to assess risk. Current yields for these types of bond funds are approximately 3%.

In the quest for highly liquid, low-risk, short-term investments, investors have a range of options to consider. Each investment vehicle comes with its own set of advantages and considerations, allowing you to tailor your choices based on your risk tolerance, financial goals, and the duration for which you can comfortably lock in your funds.

Ultimately, the key lies in finding the right balance between liquidity and returns. While high-interest savings accounts and money market accounts provide immediate access to funds, certificates of deposit, Treasury Bills, and short-term bond funds may offer slightly higher returns with varying degrees of liquidity. A diversified approach, considering a mix of these options, can help you optimize your short-term investment strategy and make the most of your excess cash while safeguarding your financial well-being.

If you would like to learn more about how you can invest in these options, please reach out to continue the conversation. Remember for cash over and above this needed amount your long-term investment strategy should be considered.

Sources:

https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/

https://fixedincome.fidelity.com/ftgw/fi/FILanding

https://www.morningstar.com/ultrashort-bond-funds

https://www.morningstar.com/muni-national-short-term-bond-funds