Where Should You Hold Your Cash?

October 24, 2023
Consider ease of access, insurance, and yield when deciding where to hold your cash.

Yields on cash investments are higher than they've been in decades, pushed up by the Fed's ongoing inflation-fighting campaign. 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, although they may have monthly withdrawal limitations. 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 money market 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 cash,1 you might consider making money market 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. Not all money market funds take the same level of risk, so before you invest be sure to know what credit risks a money market fund takes and how it mitigates those risks. Money market funds are considered securities protected from brokerage failure by Securities Investor Protection Corporation (SIPC).
  • 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 money market 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 for paying bills. Two account types offer easy access to everyday cash:

  • 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.
  • 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 SIPC in the event a SIPC-member brokerage fails.

In sum

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. No matter how you deploy your cash, be sure to revisit your decisions as your plans, goals, and needs change.

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

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

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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.

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Funds deposited at an FDIC-insured institution are insured, in aggregate, up to $250,000 per depositor, per insured institution based upon account type by the FDIC. The FDIC considers any other deposits you may have with an issuing bank. CDs you purchase from a particular bank are aggregated with any other deposits you may have with the issuing bank for determining FDIC insurance coverage (i.e., if you already have deposits of $250,000 with a bank, don't purchase CDs from the same bank in the same ownership category). Because the deposit insurance rules are complex, you may want to use FDIC's online tool, Electronic Deposit Insurance Estimator (EDIE), to estimate your total coverage at any particular bank.

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