Where Should You Hold Your Cash?

Where's the smart place to keep your cash? The answer depends on your personal circumstances and how you plan to use the funds.

Schwab believes that cash can be a key component of a diversified investment portfolio. Keeping some of your money in cash or in a cash equivalent can help reduce portfolio risk, provide stability, and generate yield on money you plan to use for a specific purpose, like having money for an emergency 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. But note that your bank may have monthly withdrawal limits. 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 (until the "maturity date"), generally between three months and five years. CDs may be appropriate if you have a long time horizon or know you won't need the money before the maturity date. 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.

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.

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.