Cash Solutions for Investors

Cash used to be something you could hold in your hand—actual bills and coins. Today, your money is more likely to live in bank and brokerage accounts. The good news? You have more choices than ever for helping it potentially earn a little something along the way.

Many banks offer checking, savings, and money market accounts, plus a limited selection of CDs. In a brokerage account, you can often access a much broader menu: CDs from many different banks, money market funds, Treasury bills, and short-duration bond funds. Having both a bank account and a brokerage account gives you more flexibility for finding competitive yields on your cash—especially for money you want to keep liquid and easy to reach.

The trick is to match your money to the right tool. A simple way to do that is to organize your cash into three buckets based on when you'll need it.

This is the cash you live on: paychecks coming in, bills going out, everyday spending. It should be easy to get to, and that's really the main job here.

Interest-bearing checking accounts are a convenient home for this money. You can deposit your paycheck, pay bills online, and tap ATMs and debit cards whenever you need to. The yield may be modest, but that's okay—the point of this bucket is access, not growth.

This is your safety net: money for a car repair, a medical bill, or a few months of expenses, if life throws you a curveball. Financial planners often suggest keeping three to six months of essential expenses set aside, with more if your income is less predictable. This bucket should be stable and accessible, but it can work a little harder than your checking account.

Bank savings and money market accounts tend to pay higher yields than a checking account. The trade-off is flexibility: some banks limit the number of monthly withdrawals or debit transactions on these accounts and may require a higher minimum balance. So you get the potential for a better return, but with a few more strings attached.

Money market funds can offer even higher income than savings accounts. They're designed to balance three goals at once—stability of your principal, liquidity (meaning you can get your money when you need it), and a competitive rate of return. For many people, that makes them a nice "sweet spot" for cushion money. (Learn more in our primer on money market funds.)

This is money you probably won't touch tomorrow, but you'll want within a few years—say, for a home down payment, a big trip, or a planned move. Because you have a little more time, you can consider options that may pay more in exchange for a bit more commitment.

CDs (certificates of deposit) can be ideal for money you'll need soon, but not right away. They may offer higher rates than money market funds in exchange for locking your money in for a set period. If you withdraw early, you may owe a penalty and give up some of the interest you've earned. Through a brokerage account, you can shop CDs from many different banks in one place—these are called brokered CDs, and they give you more choices and the convenience of managing everything in a single account. (Learn more in Schwab's guide to brokered CDs vs. bank CDs.)

Treasury bills are short-term investments backed by the U.S. government. Think of them as loans you make to the U.S. government. You can buy them directly from the government through TreasuryDirect, or you can buy them on the secondary market through a brokerage firm. One nice feature: the interest you earn on Treasury bills is exempt from state and local taxes (though you still pay federal tax on it)—which can be a real plus if you live in a high-tax state. (Learn more about the differences of CDs versus Treasuries.)

Short-duration bond funds pool your money with other investors to buy a collection of short-term bonds. They can offer competitive yields, though there may be times when these funds yield less than other options on this list. They're generally a step up the risk ladder, so they're best for money you won't need immediately.

Keep in mind that bond funds will have more credit and interest rate risk than money market funds. In addition, money market funds are designed to maintain a stable daily share price of $1.00, while bond funds and ETFs may experience daily share price fluctuations. (Learn more about bond funds and ETFs.)

Too many choices can feel overwhelming, but here's the reassuring part: you may be able to meet most of your cash management needs with just a small handful of banking and investment cash solutions. Pick one or two solutions for each of your cash buckets, and you're well on your way.

Up next, we'll look at how to make managing your cash even easier.