Learn about cash investments and savings products, including cash management accounts, money markets, and CDs. Explore investment yields and safety and learn how investing cash can support financial growth.
What are cash investments?
Points to know
- Cash investments and savings products allow you to keep money safer from market risk.
- It's a good idea to balance your cash and investments. Holding too much in cash can make it difficult to meet long-term goals.
- Looking at cash as part of your overall portfolio and how it aligns with your goals can help you decide how much cash you need, and where to keep it.
- You can invest in cash or other savings products through most financial firms.
Understanding the basics of cash investments
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.
Why invest in cash?
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 to invest in cash
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.
What is a cash management account?
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.
What’s a money market?
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.
What’s a CD?
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.
Investing in cash for short-term yields
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.
Which cash investment is right for me?
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.
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