Technically, cash isn't an investment. Cash refers to money that's not invested in the markets. It has little to no market risk and is easily accessible. It also has a maturity of 90 days or less, which means you can withdraw your principal and any earnings in less than 90 days.
Cash investments include products that have the low risk and accessibility of cash, combined with potentially higher returns than traditional savings accounts. Types of cash investments include cash management accounts and money market funds. Certificates of deposit (CDs) aren't considered cash because they have a longer maturity and a minimum investment period, but they may still be appropriate for certain types of savings.
Cash investments tend to generate more modest returns than stocks or bonds, which is the trade-off for keeping your money safer and close at hand.
While cash investments strive to reduce risk, the yield on cash investments can change frequently and is closely tied to the federal funds rate. The federal funds rate is the Federal Reserve's target interest rate, which it regularly adjusts to try and maintain its goal of keeping inflation at 2% per year. When inflation is high, the Federal Reserve increases rates, making money more expensive to borrow and discouraging spending. This causes yields on cash investments to rise. When inflation is low and the Fed cuts rates, you can expect smaller yields on cash investments.
Many people organize their assets into 3 buckets: spending, saving, and investing. Traditional bank accounts may be more convenient for holding spending money, while financial and brokerage companies can offer a wider range of investment options. Savings tend to fall in between—and that's one place cash investments can fit in.
For example, if you're saving for a house you plan to buy in a year, cash investments might provide slightly higher returns than you'd get in a traditional savings account while avoiding the risk of losing money a market downturn.
It makes sense to use a checking account to pay your everyday bills and to have access to an ATM card. But if you have larger bills that you don't pay as frequently, such as quarterly or yearly tax payments, you might want to hold some money in a cash investment.
In the same way, it makes sense to invest for longer-term goals like retirement. That's because with retirement, you won't need your money right away, so it'll have more time to grow, and you'll likely have a greater tolerance for the ups and downs of the markets. Investing can allow you to take advantage of potentially higher returns over time.
How you invest in cash and savings products depends on where you want to hold your money. The process is different depending on whether you choose a cash management account, a money market fund, or a CD.
Before choosing a cash investment or savings product, consider how they provide yields, how soon you need your money, and whether you prefer Federal Deposit Insurance Corporation (FDIC) insurance coverage.
A cash management account is an alternative to a bank savings account and is typically offered by a nonbank financial institution such as a brokerage firm. The financial company then partners with one or more program banks to provide features only available through banks, including FDIC insurance and an annual percentage yield (APY).
The Vanguard Cash Plus Account is Vanguard's version of a cash management account. It's available to open using the online account open process.
Money market funds are a type of mutual fund with ultra-short-term maturities (from a few days to one year) and are considered lower-risk investments. Their share prices are intended to be stable, although the interest rates they pay will fluctuate (and the stability of the share price isn't guaranteed). Money markets are also extremely liquid, so you can access your money quickly.
Find out more about money market mutual funds
As a cash investment, money market funds can play an important role in your portfolio. Money markets are low-risk investments that allow you to earn income while you're saving for short-term goals, deciding where you want to invest your cash, or preserving your emergency fund.
Money market funds invest in the lowest-risk assets, like U.S. Treasury bills and CDs, which makes them one of the safest investments. In addition, money market funds may yield higher returns than what you'd earn from traditional savings accounts.
You can invest in a money market fund by buying shares in one through a mutual fund brokerage firm, like Vanguard.
CDs are promissory notes issued by banks. As such, they're insured up to a certain amount by the FDIC and considered completely safe if held until maturity.
Like bonds, CDs have a specified interest rate and maturity date (usually 5 years or less). Typically—though not always—CDs with longer terms will offer a higher interest rate, since banks want to make it more attractive for you to keep your money invested for a longer period. Sometimes, CDs with shorter-term maturities can pay a higher yield. When that happens, it's usually because interest rates are higher at the time the CD is issued, but the bank expects the federal funds rate to decrease and bring interest rates down during the longer CD's term.
Money in a CD grows at a predictable, fixed rate, adding interest to the principal amount. The APY paid on a CD usually includes the compound interest rate, which you'll earn when interest payments are added to the CD's principal amount.
It's important to recognize that CDs aren't liquid like money market funds. If you buy a CD through a bank, you'll pay an interest penalty if you need your principal back before the maturity date. If you buy a CD through a brokerage, the value of the CD will fluctuate but there's no penalty for selling the CD on the secondary market before maturity.
You can purchase traditional CDs through a bank or credit union, or you can buy brokered CDs through a brokerage firm. Though both types of CDs are similar, banks and credit unions only sell their own CDs, while brokerages can offer CDs from a variety of different banks.
When you're saving for short-term financial goals, cash investments may help you generate higher returns than you'd get from traditional bank savings accounts.
Understanding the relationship between time, yield, and risk can help you decide how you want to invest. Generally, investments that are riskier have the potential to yield higher average returns, while investments that are safer tend to have lower average returns. In addition, the more time you have to keep your money invested, the more likely it is to grow, thanks to compounding.
With so many cash investment and savings options, choosing the right one for you might seem challenging. To help you decide where to invest cash, think about your risk tolerance, time horizon, and goal.
If you want easy access to your money, potentially higher yields than a traditional savings account, and potential FDIC coverage, you may want to consider a cash management account.
If you're sure you won't need the money on short notice, a CD might be a good fit.
If you want a low-risk investment and aren't concerned about FDIC coverage, money market funds may offer the right combination of accessibility, low risk, and income potential.
Whichever you choose, remember to consider your savings when you think about your overall financial picture. That way you can feel confident you're making informed, strategic choices.
Our savings strategies can complete your holistic financial picture
All investing is subject to risk, including the possible loss of the money you invest.
Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corporation, which is an agency of the federal government.
The Vanguard Cash Plus Account is a brokerage account offered by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC. Under the Sweep Program, Eligible Balances swept to Program Banks are not securities: They are not covered by SIPC but are eligible for FDIC insurance, subject to applicable limits. Money market funds held in the account are not guaranteed or insured by the FDIC but are securities eligible for SIPC coverage. See the Vanguard Bank Sweep Products Terms of Use and Program Bank list for more information.
Savings accounts may have characteristics that differentiate them from bank sweep programs offered by Vanguard Cash Plus. For example, they may offer overdraft protection, ATM access (immediate access to your money), and other convenience features. Each company's products differ, so it's important to ask questions to understand account features.
You should consider all material differences before choosing to invest.
All brokered CDs may fluctuate in value between purchase date and maturity date. CDs may be sold on the secondary market, which may be limited, prior to maturity subject to market conditions. Any CD sold prior to maturity may be subject to a substantial gain or loss. Vanguard Brokerage does not make a market in brokered CDs. The original face amount of the purchase is not guaranteed if the position is sold prior to maturity. CDs are subject to availability. As of July 21, 2010, all CDs are federally insured up to $250,000 per depositor, per bank. In determining the applicable insurance limits, the FDIC aggregates accounts held at the issuer, including those held through different broker-dealers or other intermediaries. For additional details regarding coverage eligibility, visit fdic.gov. Vanguard Brokerage imposes a $1,000 minimum for CDs purchased through Vanguard Brokerage. Yields are calculated as simple interest, not compounded. Brokered CDs do not need to be held to maturity, charge no penalties for redemption, and have limited liquidity in a secondary market. If a CD has a step rate, the interest rate of the CD may be higher or lower than prevailing market rates. Step-rate CDs are subject to secondary market risk and often will include a call provision by the issuer that would subject the investor to reinvestment risk. The initial rate of a step-rate CD cannot be used to calculate the yield to maturity. If a CD has a call provision, the issuer has sole discretion whether to call the CD. If an issuer calls a CD, there is a risk to the investor that the investor will be forced to reinvest at a less favorable interest rate. Vanguard Brokerage makes no judgment as to the creditworthiness of the issuing institution and does not recommend or endorse CDs in any way.
For more information about Vanguard mutual funds or Vanguard ETFs, obtain a mutual fund or an ETF prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
