Where Should You Hold Your Cash?

May 12, 2022
Consider ease of access, insurance, and yield when deciding where to hold your cash.

With interest rates and inflation rising in tandem, you might be wondering how to get the most out of the cash you hold. Rising interest rates have started to offer better yields on the cash you can invest, even as inflation erodes your long-term purchasing power. So, where's the smart place to keep your cash? It depends on how you plan to use it.

Should you have cash in your investment portfolio?

Schwab believes that cash can be a key component of a diversified investment portfolio, helping to reduce portfolio risk, provide stability, and generate yield on the money you need for specific goals like establishing an emergency fund or making a down-payment on a house. 

There are a few options to consider for savings and investment cash:

  • A yield-bearing savings account can be used for cash that you've set aside for an emergency or that you're planning on moving to a checking account soon. This type of account probably won't offer the highest yield, but you'll be able to access your cash immediately. 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.
  • A purchased money fund is a type of mutual fund designed to keep your capital stable and liquid. Such funds invest primarily in high-quality, short-term debt securities. If you're willing to wait a day to access your cash1, you might consider making money funds part of your portfolio because they can offer higher yields than a savings account. Although yields fluctuate, such funds strive to preserve the value of your investment. That said, money funds are not FDIC-insured.
  • A Certificate of Deposit (CD) 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 (the "maturity date"), generally between 3 months and 5 years. CDs may be appropriate if you have a long time horizon or know you won't need the money immediately. 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 you may 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.

Should you have cash outside your investment portfolio—and if so, where do you put it?

You'll need a place to keep so-called "everyday cash"—the money you use for day-to-day expenses and paying bills. Two account types offer easy access to everyday cash:

  1. A checking account can help cover daily spending needs, check-writing, and ATM usage. Bank checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US government, against the loss of up to $250,000 per depositor, per insured bank, based on account ownership type.
  2. A 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.

When you're deciding where to hold your cash, ease of access, insurance, and yield all figure into the picture. For near-term use, accessibility will be a big consideration, while cash for long-term use has the potential to earn higher returns. However you deploy your cash, be sure to revisit your decisions as your plans and goals change.

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

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