Learn how to invest cash wisely with savings accounts, CDs, money market funds, and short-term bonds. Find the best strategies for growing your cash today.
How to invest cash wisely
Are you letting hard-earned cash sit in a savings account? It may not keep pace with inflation, eroding your purchasing power over time. For instance, if inflation is running at 3% annually and your savings account earns only 0.5% interest, your money is losing value.
Checking accounts are convenient, but financial and brokerage companies offer a wide range of investment options if you're looking for other benefits like potentially higher returns. Investing cash wisely is an important step toward building financial security. It can help you ensure that your funds are readily available when you need them while still making progress toward your long-term financial goals.
Factors to consider when choosing where to invest cash
When deciding what to do with your cash, it's important to understand your options, then choose one that aligns with your goals. Common options include savings accounts, cash management accounts, money market funds, and brokered certificates of deposit (CDs).
If you simply want to save cash in an account, a traditional savings account offered through a banking institution or credit union is a common option. However, as mentioned above, it may not keep pace with inflation. High-yield savings accounts may offer a higher interest rate than traditional savings accounts. It's important to check and compare interest rates to ensure you're making the most of your cash savings.
For those seeking higher returns and easy cash transfers to their brokerage accounts, cash investment products offered by brokerage firms may be more suitable. These include cash management accounts and money market funds. The Vanguard Cash Plus Account is an example of a cash management account that you can view alongside your other Vanguard accounts.
Remember, there isn't a one-size-fits-all solution. You may decide to diversify and use multiple options, such as holding an emergency fund in your bank savings account while investing cash for short-term goals in a money market fund.
See our suite of cash investments
Savings accounts
Traditional savings accounts, typically offered by banks and credit unions, are a fundamental tool for managing short-term savings. These accounts are highly liquid, allowing you to access your money for short-term expenses and emergencies. You can quickly tap into your cash when unexpected costs arise.
While the interest rates on savings accounts are generally lower compared with other investment options, they provide a stable and secure environment for your cash. They're backed by FDIC insurance, which covers up to $250,000 per depositor, per ownership category and per financial institution. This means even if the bank fails, your money is protected by the federal government, up to applicable limits.
Cash management accounts
Cash management accounts are versatile alternatives to traditional savings accounts and are often provided by investment firms. They come with a range of convenient features that help you manage cash flow, such as account and routing numbers, bank transfers, and compatibility with digital payment apps.
These accounts also may provide competitive annual percentage yields (APY), which can be higher than those offered by traditional savings accounts. This makes them a suitable option for those looking to earn a bit more on their cash while maintaining flexibility.
Cash management accounts offer greater flexibility than CDs, and they don't come with the minimum balance requirements that some money market funds have. Many cash management accounts also let you invest in money market funds, so you can potentially earn higher returns while keeping your funds liquid and accessible.
These accounts may also offer Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) protection, depending on the provider. They are ideal for those who want a convenient way to manage their cash, with the added benefit of typically higher returns compared with traditional bank savings accounts.
The Vanguard Cash Plus Account is Vanguard's high-yield savings account alternative. It offers 2 ways to allocate your cash. One option is to keep the funds in the bank sweep program, where balances are placed in one or more program banks and are eligible for FDIC coverage.1 Alternatively, you can diversify your money across 5 Vanguard money market funds that invest in short-term, high-quality debt securities and are covered by SIPC insurance.
Money market funds
Money market funds are mutual funds that invest in short-term, low-risk securities. These funds typically offer higher yields than traditional savings accounts, making them suitable for short-term savings.2 Like savings accounts, they are extremely liquid and allow you to access your money quickly when needed.
One key benefit of money market funds is that they're protected by SIPC, a nonprofit corporation that works to restore investors' cash and securities in the event of a brokerage firm failure. Money market funds enjoy SIPC protection of up to $500,000, including $250,000 for cash claims, in each eligible brokerage account.
Certificates of deposit
Certificates of deposit (CDs) are investment products that offer fixed interest rates and locked-in terms. This means you agree to leave your money in a CD for a specific period, ranging from a few months to several years. In return, you receive a higher interest rate compared with a traditional bank savings account.
CDs are particularly useful for savings with a specific target date, such as a down payment on a house, an upcoming wedding, or a future vacation. The fixed interest rate and term provide predictable growth, making it easier to plan for these events.
However, be aware that withdrawing your money before the term ends can result in penalties, which can vary depending on the term of the CD and the bank's policies. These penalties can sometimes negate the interest earned, so make sure you won't need the funds before the maturity date.
Like savings accounts, CDs are typically insured by the FDIC, which covers up to $250,000 per depositor, per ownership category, and per financial institution, up to applicable limits, providing a layer of security for your investment.
The role of cash in your portfolio
While cash may not be the best choice for achieving long-term investment goals, maintaining a cash reserve is essential for managing daily expenses, building your emergency savings, and meeting other short-term goals. The amount of cash you should invest depends on several factors, including your funding level, risk tolerance, and time horizon.
Funding level
Your funding level is how close your current balance plus future planned contributions are to the amount needed to reach your goals. To effectively manage your cash and investments, evaluate your current financial situation and determine the specific amount of money needed to achieve your goals. This may influence the decision to include cash as part of your asset allocation.
Risk tolerance
Your risk tolerance is another key consideration when it comes to how much cash you wish to hold. Risk and return are a trade-off. Generally, allocating more of your portfolio to cash will move it toward the more conservative end of the risk spectrum—while also moving it toward the lower end of the expected return spectrum.
Time horizon
If you have a longer time horizon—typically 10 years or more—investing in higher-risk assets like stocks and bonds can potentially offer better returns. Historically, these investments tend to outperform cash, despite their inherent volatility. Aligning your investment strategy with your time horizon helps balance growth and security to achieve your financial goals.
Bottom line: Investing cash wisely means aligning your choices with your short-term and long-term goals to build a balanced financial strategy.
Here's how to get the most from your cash
Frequently asked questions about where to invest cash
Savings accounts and CDs are generally considered low risk and are FDIC insured, up to applicable limits, which means your funds are protected up to $250,000 per depositor, per ownership category, per insured bank. Cash management accounts may offer FDIC or SIPC protection, depending on the provider. Money market funds are designed for stability, and although they're not insured by the FDIC, they may be eligible for up to $500,000 of coverage under SIPC when held in a brokerage account.
Make sure you understand the risks and protections associated with each type of account before choosing where to invest cash.
Both types of accounts can be used for savings, so it's mostly a matter of investor preference. Money market funds can offer slightly higher returns, but they carry slightly higher risk than savings accounts because they invest in short-term securities, whereas savings accounts are federally insured and guarantee the safety of your principal up to $250,000. There are also additional options to consider, like cash management accounts and CDs.
It's important to have enough money to pay for expenses and cover unexpected emergencies, so that you don't have to tap into long-term investments to fund short-term expenses. Ideally, you can do this in an account that offers liquidity, like a savings account, money market funds, or a cash management account. While you have this buffer in place, you can also allocate additional funds to higher-yielding investments.