Balancing your investment portfolio can sometimes feel like walking a tightrope. Higher-risk investments may produce greater rewards, but leaning too much into one type of investment could also cause your investment portfolio to take a dive should that investment go south. Depositing some of your money into a cash investment account could help lessen some of your risk, especially if you’re older and looking to transition from riskier to less-risky investments. It’s also a decent move to make if you’re pausing to you get your bearings and want to protect your money and maintain stability as you ponder your next financial move. Just be aware that, in exchange for less risk, cash investments typically offer lower returns than higher-risk investments.
Here are three kinds of FDIC-insured cash investments that could help you preserve capital while also growing your savings.
1) Standard & High-Yield Savings Accounts
Liquidity is one of the primary benefits of selecting a standard savings account in which to deposit your cash. You can access funds your funds when you need them, without any penalties. However, these types of accounts typically offer low interest rates.
A better option may be a high-yield savings account, which typically pays an interest rate 20-25 times that of the national average of standard savings accounts. Just be aware that a high-yield savings account may come with additional restrictions a standard savings account does not, including initial deposit requirements, minimum balance requirements, and possible fees. It’s worth noting that many high-yield savings accounts are only available online, so opening one with your current bank may not be an option.
Both of these types of savings accounts are insured for up to $250,000 in deposits, per account holder, per bank.
2) Money Market Accounts
If you know you’ll need cash soon, but you’re not exactly sure when, then a money market account may be a good option for a cash investment. Money markets typically require you to deposit a minimum balance to open an account and to maintain a minimum balance in order to get the highest interest rate.
A big plus with money markets is that they often allow you to write checks on the account and make purchases with a debit card linked to the account—although, unlike with a regular checking account, money markets only allow six transactions per month. Money markets are also federally insured for up to $250,000.
3) Certificates of Deposits
When you’re confident that you won’t need the cash for an extended period, a certificate of deposit (CD) can offer a higher return than either savings or money market accounts. With a CD, you agree to leave your money in the account for a set amount of time, which is knows as its term length. You can’t access your money during that term length without paying a penalty.
CDs come in two types: basic and high-yield jumbo CDs. Both types work the same general way; it’s just that jumbo CDs typically require larger deposits and pay higher interest rates.
With both shorter- and long-term CD terms available, investors can select from a variety of options to find a CD that meets their financial goals. Generally, the longer the CD term, the higher the guaranteed rate of return.
Holding multiple CDs with varying maturity dates allows investors to stagger their earnings by using what’s called a CD ladder investing strategy. If executed properly, this strategy also frees up cash on a regular basis. For example, evenly investing $9,000 across three CDs on the same date could allow access to a portion of the invested funds every six months:
Hypothetical example*
| Deposit Amount, Term, APY | Opening Deposit Date | Maturity Date |
|---|---|---|
| CD 1 – Deposit $3,000 (6-month term/1.90%) | January 1 | July 1 |
| CD 2 – Deposit $3,000 (12-month term/2.15%) | January 1 | January 1 (the following year) |
| CD 3 – Deposit $3,000 (18-month term/2.15%) | January 1 | July 1 (the following year) |
In the above example a CD matures every six months. As each one matures, an investor has the option to re-up on the same CD, invest it elsewhere, or use it any other way they choose.
CDs are less liquid than the other two cash investment options covered in this article because they have term lengths. While it is possible to get at your money in an emergency, you will incur a penalty, which could significantly reduce the earnings you would’ve received had you allowed the CD to mature without touching the money. Like all of the other cash investments covered, CDs are federally insured up to $250,000.
Where you invest your cash will likely depend upon your overall investment strategy and timeframe. Whether you’re saving money or just need to hold money in an account while you decide on your next investment, any of these cash investments offer a safe place to keep your funds. The rate of return you’ll receive depends on the investment you choose, how much you have to invest, and how diligent you are about letting your investment mature and collect interest.
*Best CD Rates for January 2020 www.bankrate.com/banking/cds/cd-rates/
Jennifer Brozic began her writing career at seven years old, when she scribed the epic tale of her kite-flying (and skyward-looking) uncle crossing paths with a deep hole in a sandy beach. After earning a degree in journalism, Jen worked in the insurance and financial services industries before earning a master’s degree in communication management. She left the nine-to-five corporate world in 2010 and has been freelance writing ever since. Her areas of expertise include insurance, financial planning & budgeting, and building credit.
