Repeated interest rate hikes by the Federal Reserve since 2015 have boosted returns on some cash investments—so much so that three-month Treasury bills (which are considered a form of cash investment) were delivering their highest yields in more than a decade earlier this year.1
That doesn’t mean you should sell other investments to stockpile more cash; after all, past performance is no guarantee of future results. But it does mean the time is ripe to put your cash to work. How hard depends on your time horizon:
- Everyday funds should be kept somewhere ultraliquid—think a standard checking or savings account. Such accounts have recently been earning just a fraction of a percentage point, however, so if you’ve got cash you don’t need for daily use, you might want to park it elsewhere.
- Short-term reserves set aside to cover unexpected expenses could be invested in a money market fund—a very liquid type of mutual fund that invests in high-quality short-term debt securities such as Treasury bills. Although yields fluctuate, such funds strive to preserve the value of your investment, at the very least.
- Money you won’t need for at least a month also could be appropriate for money market funds. However, certificates of deposit (CDs) might make more sense, depending on your time horizon. That’s because CDs offer higher yields the longer your cash is invested (though if you need the money sooner than expected, you may be charged an early withdrawal penalty). What’s more, CDs offer a fixed rate of return, which can be advantageous when interest rates are in decline.
“It helps to have a clear understanding of your choices,” says Rob Williams, CFP® and vice president of financial planning at the Schwab Center for Financial Research. “That way, you can put your cash to the best possible use.”
1Federal Reserve Bank of St. Louis, as of 04/22/2019.