Portfolio Management | April 2, 2020

Where Should You Hold Your Cash?

In today’s volatile environment, cash has a special role to play in your financial life and portfolio—it can offer liquidity, stability and flexibility.

But where do you hold your cash? At the end of the day, how you intend to use the cash will help you determine the smartest place to put it. There are a number of choices and what you ultimately select depends on considerations like your time horizon, ease of access, insurance, and yield.

Here’s our guide to helping you choose the most appropriate place for both your everyday cash and your savings and investment cash.

Everyday cash

Everyday cash is money you need for day-to-day expenses, paying bills, and investing. Typically, ease of access is of top importance. There are a couple of account types to consider.

  • 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 (e.g. joint accounts)  if the FDIC-insured bank were to fail.
  • 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 Securities Investor Protection Corporation (SIPC), in the event a SIPC-member brokerage fails.

Savings and investment cash

Savings and investment cash is money you need for an emergency fund (three to six months of living expenses) or a specific short-term goal like a car or a down-payment on a house. It can also be used as a key component of a diversified portfolio, to help reduce portfolio risk and provide stability.

There are a few options to consider for your savings and investing needs.

  • A yield-bearing savings account from a bank 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. A yield-bearing savings account probably won’t offer the highest yield, but you’ll be able to access your cash immediately (although withdrawals and transfers to other accounts are limited to six per month, barring certain exceptions). 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 purchased money 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, you might consider buying money funds as part of a diversified portfolio because they can offer higher yields than a savings account. Although yields fluctuate, such funds strive to preserve the value of your investment. That said, money funds are not FDIC insured.
  • 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 cash is invested and is typically, but not always, higher than yields on individual U.S. Treasury bonds or purchased money funds. However, if you need to withdraw the money sooner than expected, you may be charged an early withdrawal penalty. CDs are insured by the FDIC against the loss of your money up to $250,000 per depositor, per FDIC-insured bank.

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