Best Places to Park Cash
Are you wondering, “What is a good alternative to cash?
Are you sick of meager interest payments on your savings?
Finally, interest rates are increasing. You can get a good return on your cash today, and set yourself up for higher interest payments later. As rates go up, there are several places to park your cash and automatically receive higher interest payments, like money market mutual funds and high yield cash accounts at robo-advisors.
If you’re seeking cash alternatives, and willing to tie up your money for 3, 6, 9 months or a year, you can get even higher returns from Treasury Bills, and certificates of deposit (CDs).
- Best Places to Park Cash
- Why You Need Cash
- 7 Alternatives to Cash
- Alternatives to Cash – Wrap Up
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Why You Need Cash
You need to keep a certain portion of your money in a liquid, cash-type account for short and intermediate term goals. If you’re thinking about buying a house or a car in a year or so, don’t put the down payment in the stock market. You also need to be prepared for those pesky emergencies; a leaky roof, a blown gasket, or that unexpected medical bill. Additionally, during periods of investment market declines, it’s nice to know that you won’t need to sell stocks at a loss to meet immediate financial needs.
Here are a few strategies to earn a good return on your cash.
7 Alternatives to Cash
1. High Yield Cash Accounts
Automated investment advisors or robo advisors aren’t just for investment management, many also offer high cash returns with no fees or lock up periods. In fact, many robo-advisors are paying yields greater than money market mutual funds. It’s simple to open a high yield cash account at a robo-advisor company like Wealthfront, Betterment or M1 Finance. After providing basic personal identification information, simply link your bank account and transfer the cash in. Robo-advisor cash accounts can offer high rates because they partner with several banks, to offer the highest available cash yields or returns. These financial companies also offer bank-level security.
2. Money Market Mutual Funds
These financial instruments have a stable one dollar value and pay higher yields than most savings accounts. They typically own short term debt issued by corporations and government. These are not the same as a “money market account” that might be offered at a bank. You’ll need to buy these cash alternative mutual funds within a major investment brokerage account like Fidelity, Vanguard, Goldman Sachs or others. If you have a cash balance in an investment brokerage account make sure to transfer it to a higher yielding cash alternative money market mutual fund. the cash is easy to access when needed for future investments.
Most financial brokerage firm cash sweep accounts pay lower interest rates on cash, than a money market mutual fund. Just remember to transfer the cash out of the fund when needed for future investment trades.
A money market fund is a kind of mutual fund that invests in highly liquid, near-term instruments. These instruments include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity (such as U.S. Treasuries). Money market funds are intended to offer investors high liquidity with a very low level of risk. Money market funds are also called money market mutual funds.
3. TIPS-Treasury Inflation Protected Securities
Treasury Inflation Protected Securities (TIPS) won’t make you rich, but when inflation increases, so will the interest rates paid on your TIPS bonds.
How does the TIPS investment work?
- With TIPS, the interest rate is set at the purchase date. It always stays the same.
- The principal value of the investment goes up and down with the inflation rate.
- When the principal increases (decreases) you will get a larger (smaller) interest payment on the new principal amount.
- When the TIPS security matures, you get the higher or original principal amount; At maturity, you never get a smaller principal.
You can buy TIPs at TreasuryDirect.gov or through your investment brokerage account.
If you prefer to buy a TIPs fund like VTIP, you can purchase that through any investment brokerage firm that sells ETFs. Both SoFi Invest and M1 Finance offer ETFs investing and fee-free investment management. SoFi also offer access to free financial advisors.
4. Series I Government Bonds
Series I (for inflation) Government Bonds are similar to TIPS. With I bonds you not only get a fixed interest rate, but you get a bonus; an adjustable rate of interest that changes every six months, along with the inflation rate. So the combined interest rate includes a fixed interest rate plus an inflation adjusted rate for a new combined interest rate which adjusts every six months. These bonds can be bought at your bank or at Treasurydirect.gov for as little as $100 in an amount up to $10,000.00 per year. They are among the best choice for inflation protection.
One disadvantage of I Bonds for wealthier investors is that you’re limited to purchasing $10,000 per year plus an additional $5,000 with your federal tax refund.
5. Treasury Bills
Another government savings product is the U.S. Treasury Bill. These are among the best places to park cash because of the higher yields and safety of a product backed by the U.S. government. Treasury bills come in various maturities ranging from a few days to 52 weeks. As interest rates rise, you’ll receive higher returns. One strategy to take advantage of rising interest rates is to ladder or regularly buy new issue three or six month treasury bills.
You can buy treasury bills at Treasurydirect.gov or through many major investment firms.
6. Short Term Bonds or Bond Funds
These higher yielding alternatives to cash come with principal risk, not found in CDs or money market mutual funds. Principal risk means that the value of your initial investment might fluctuate.
If you have a larger portfolio, you can buy individual bonds which mature within the next 1-3 years. Check your discount investment broker for available issues. If you prefer, there are short term bond funds which will increase your investment returns a bit. For example, the Vanguard Short Term Index Bond Fund (VBISX) or a related ETF (BSV). Each of those short-term bond index funds yield 1.39% and 1.45% respectively (the return will change based upon market forces). Also, be aware that unlike your bank savings account or certificate of deposit, the principal value can fluctuate.
When interest rates rise, the value of your bond fund and individual bonds will decline. If you hold the individual bonds until maturity, changes in the bond’s value don’t matter as you’ll receive your initial payment as well as any coupon or interest payments along the way. Bond funds work differently. As a cash alternative, bond funds will offer higher yields, but these yields can be offset by price declines, if interest rates rise. If you don’t sell the fund, as new bonds are added to the fund, you’ll receive larger distribution or interest payments.
7. Certificates of Deposit (CD)
Certificates of deposit are sold through banks and financial brokerage firms like Schwab and Fidelity. In exchange for keeping your money invested for a specific length of time, the financial institution will pay higher interest rates. CDs are sold in various maturities from 3 months to 5 years. The longer term CDs typically offer higher returns. If you decide to sell, you might forfeit a small amount of interest.
To take advantage of the potential for future interest rate increases you might ladder the CDs. That means put part of your cash in each of the terms, 1, 3, and 5 year CDs. That way when one CD comes due, you can reinvest the proceeds and receive the higher future yield.
Alternatives to Cash – Wrap Up
As interest rates rise, make sure you’re aware of the best places to park your cash. For easy cash access or liquidity, try a high yield cash account at Wealthfront, Betterment or M1 Finance. These cash accounts are completely liquid and as interest rates go up, so will your returns. If you have an emergency fund, you might invest part of your cash in three to six month treasury bills or CDs to get a higher yield.
Get the best rate you can today, but don’t tie your money up for too long as rates are expected to increase for the next year or so.
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