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Cash: What to Consider in the New Rate Environment

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.

What you can do next

Want to learn more? To explore cash management solutions available through Schwab and Schwab Bank, click here. If you’d like help from a Schwab investment professional, call 800-355-2162

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Important Disclosures

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 or economic 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.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

An investment in a money market fund is not a bank deposit and is neither insured nor guaranteed by the FDIC or any other governmental agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds. Investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost.

Certificates of deposit are issued by various FDIC-insured institutions, and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment.

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. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products are offered by Charles Schwab & Co., Inc., Member SIPC. Deposit and lending products and services are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender.

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


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