The Federal Reserve has recently raised short-term interest rates from near zero, and may continue to increase them if the economy improves.
Rising rates could mean higher yields on checking and savings accounts, money market funds, short-term certificates of deposit (CDs) and Treasury bills. If you haven’t thought about cash and cash investments lately, it might be time to learn more about your options.
What is “cash?”
Many people think of cash as physical currency—actual bills and coins in circulation. For practical purposes, however, an allotment to cash and cash investments can also include bank deposits (checking and savings accounts), money market funds and short-term investments such as CDs and short-term Treasury securities.
In general, no single cash product will serve all purposes equally. Consider their specific features when deciding which is best for your needs. Here are a few suggestions:
Why hold cash and cash investments?
There’s always a role for cash and cash investments in your financial plan, in our view, even when interest rates are low. Here are three broad reasons to hold cash and cash investments:
- Liquidity: You need cash to cover day-to-day expenses. You may also need a supply of cash for emergencies, such as a health problem or a job layoff. A good rule of thumb is to keep enough cash on hand to cover three to six months’ worth of living expenses.
- Flexibility: By holding a portion of your investment portfolio in cash, you can take advantage of investment opportunities as they arise. In addition, a cash allocation can provide flexibility when it's time to rebalance your portfolio.
- Stability: Cash investments tend to be more stable than other types of investments, such as stocks or bonds. They can provide stability to a portfolio by performing differently than other investments in the same market conditions. In the appropriate proportion, cash and cash investments can help to reduce the risk profile of your portfolio over time.
Although yields on cash and cash investments are typically low, they may increase if the Fed continues to raise short-term interest rates. Rising interest rates could enhance the attractiveness of cash and cash investments. If you haven’t thought about your cash allocation for a while, it might be time to consider your choices.
1 Federal Deposit Insurance Corporation (FDIC) insurance covers deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account, certificate of deposit (CD), or an official item issued by a bank, such as a cashier's check or money order. At the time of publication, each depositor is insured to at least $250,000 per insured bank.
2 Note: 2016 amendments to money market fund reform (MMFR) created significant changes to the way some money market funds report their net asset value. In addition, money market fund eligibility rules were altered by MMFR. While money market funds are still designed to provide stability, liquidity and a competitive market-based rate of return for all investor types, it is important to talk with your financial advisor about money market fund shareholder suitability.