Time to Put Your Cash to Work?

February 16, 2023
With interest rates higher than they've been in years, there's a strong case for seeking extra yield with your cash holdings.

Cash and cash investments—you need them for both your immediate and near-term spending needs and as ballast for your long-term investment portfolio.

Unfortunately, recent years haven't exactly been a showcase for this asset class's virtues. Low interest rates meant returns on cash and cash investments were paltry, even as the recent surge in inflation ate away at the dollar's spending power. In our view, these were never arguments against holding cash, for reasons we'll cover below, but investors could be forgiven for thinking the cash portions of their portfolios slightly unglamorous.

How times have changed. Investors who didn't bother putting their cash to work in the past should really think again. Aggressive interest-rate increases by the Federal Reserve over the past year have pushed up yields on everything from checking accounts to short-term bonds. That means potentially overlooked pockets of cash—in your emergency fund, for example, or money you've set aside for an approaching project—could be deployed to earn a return with relatively low risk.

Here is a snapshot of where rates were recently.

Short-term interest rates

Yield-bearing checking account: National Average: 0.1%, Top 1% Average: 2.3%; Yield-bearing savings account: National Average: 0.3%, Top 1% Average: 3.8%; Money market fund: National Average: 0.4%, Top 1% Average: 3.6%; CDs (<1 year maturity):	National Average: Up to 0.8%, Top Rate: Up to 5.0%; Treasury bills (<1 year maturity): 4.7% to 4.9%; CDs (1-4 years maturity): National Average: Up to 1.3%, Top Rate: Up to 5.1%; Treasury notes and bonds (1-4 years): 3.9% to 4.9%; Municipal bonds (1-4 years): 2.6% to

Sources: (1) National deposit rate from FDIC as of 1/17/2023. (2) LendingTree through DepositAccount.com on 2/07/2023. The Top 1% Average refers to the average rate available from highest-yielding accounts. (3) Schwab BondSource® on 2/07/2023. In the bond market there is no centralized exchange or quotation service for most fixed income securities. Prices and yields in the secondary market generally reflect activity by market participants or dealers linked to various trading systems. Bonds shown in or offered through Schwab BondSource® may be available through other dealers at superior or inferior prices/yields compared to those shown in Schwab BondSource®. Schwab BondSource® is a proprietary fixed income quote and order management system, mark up and transaction fees may apply. All prices/yields are subject to change without prior notice. For illustrative purposes only. Past performance is no guarantee of future results.

So, what does all this mean in practical terms? Here are some thoughts.

How much is enough?

No matter your age, financial planning isn't just for far-off goals like paying for retirement. You need to account for your current day-to-day expenses. Other funds may be earmarked for specific goals you want to accomplish in the next couple years. 

Such money should be protected, rather than left exposed to market swings. It's a question of risk capacity: knowing how much you can afford to lose compared with how much time you have to recover. When you have a clear understanding of your cash needs over the next two to four years, you can feel more comfortable taking more risk for potentially higher returns with the rest of your portfolio.

So, for your near-term spending goals, consider taking these two steps:

  1. Estimate how much money you'll need to spend in the next few months, the next year, and then the next two to four years. Subtract from that the income you expect to make. The difference is what you may need to withdraw from your investment portfolio.
  2. Invest that amount with capital preservation in mind. Short-term rates may not beat inflation but managing your money according to your goals' time horizons can help put you on the road to financial success.

Of course, protecting money doesn't mean you can't also put it to work. How you do so will depend on what you want to accomplish:

  • Cash for emergencies and immediate needs. We generally recommend investors maintain an emergency fund holding three to six months of essential expenses (though, retirees have special needs, which we'll discuss below). Because you may need to access such funds quickly, consider keeping them in a yield-bearing savings account. Returns may be low, but liquidity is key. Savings accounts are insured by the FDIC against the loss of your money up to $250,000 per depositor, per FDIC-insured bank, based on account ownership type.
  • Cash you may need soon, but not urgently. If you're willing to wait a day to access your cash1, you could consider using a purchased money fund, which is designed to keep your money relatively safe and can offer a higher yield than a savings account. Such funds invest primarily in high-quality, short-term debt securities. Although yields fluctuate, money funds strive to preserve the value of your investment. That said, these funds are not FDIC-insured.
  • Cash you'll need in the coming years. For goals that you want to accomplish within the next two to four years—say, saving for a down payment on a home, buying a car, taking a big trip—consider a Certificate of Deposit (CD). This is a type of savings account issued by a bank that offers you a fixed rate of return in exchange for locking away your funds for a set period of time, generally between three months and five years. As a rule, the yield on a CD is higher the longer your money is invested and is typically (but not always) higher than yields on individual U.S. Treasury bonds or purchased money funds. However, if you need to withdraw the money sooner than expected, you may be charged an early withdrawal penalty and receive back less than the premium at maturity. CDs are insured by the FDIC against the loss of your money up to $250,000 per depositor, per FDIC-insured bank.
  • Cash in your brokerage account. Uninvested cash from this type of account earns interest and is available for investing or managing expenses. Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade. Assets in your brokerage account are protected up to $500,000 per investor, including a maximum of $250,000 in cash, by Securities Investor Protection Corporation (SIPC), in the event a SIPC-member brokerage fails.

Special considerations for retirees

Because retired investors typically must draw an income from their savings, we suggest they consider structuring their funds with both liquidity and longer-term growth in mind. That means:

1. Setting aside one year of cash and cash investments

Try to set aside enough cash—minus any regular income from rental properties, annuities, pensions, Social Security, investment income, etc.—to cover a year's worth of retirement expenses. As with cash that you might need for any immediate or upcoming goal, you could consider using a relatively safe, liquid account, such as an interest-bearing bank account, money market fund or short-term CD.

With such holdings, you won't have to worry as much about the markets or a monthly paycheck. Spend from this pot of savings and replenish it periodically with funds from your invested portfolio. Then invest the rest of your portfolio sensibly.

2. Creating a short-term reserve

Within your main portfolio, starting with accounts that you may need to tap soon, create a short-term reserve to cover withdrawals from your portfolio and help weather a prolonged market downturn—we suggest two to four years' worth of living expenses, again after accounting for other regular income sources, if you can. This short-term reserve will help prevent you from having to sell more volatile investments, like stocks, in a down market.

This money can be invested in high-quality, fixed income investments, such as short-term bonds or bond funds. Or, if you'd rather manage individual investments, you might want to create a short-term CD or bond ladder--a strategy in which you invest in CDs or bonds with staggered maturity dates so that the proceeds can be collected at regular intervals. When the CDs or bonds mature, you can use the money to replenish your bank account.

With a year's worth of cash on hand and a short-term reserve in place, consider investing the remainder of your portfolio in investments that align with your goals and risk tolerance.

In sum

Today's higher interest rates give investors a variety of options for making strategic use of the cash in their portfolios. If you aren't already making the most of your cash holdings, consider doing so soon.

1If you sell your shares by 4 p.m. ET, you'll have next-day access to funds.

We can help you put your cash to work.

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Related topics

Securities Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

Investors in money market funds should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Investing involves risk including loss of principal.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Fixed-income securities are subject to increased loss of principal during periods of rising interest rates. Fixed‐income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio. You must perform your own evaluation of whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances.

Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly.

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