Savings accounts
- Savings accounts at banks offer flexibility and insurance from the Federal Deposit Insurance Corporation (FDIC).
- Liquidity and flexibility: Savings accounts are liquid. That means you can access your savings when you need or want to.
- Insurance: FDIC insurance means the government would insure you against losing your money if the bank were to fail. The insurance covers losses of up to $250,000 per person, per bank, per account ownership category. That limit may require you to spread your money across accounts at several banks in order to make sure all your money is insured.
- Uses: Savings accounts can be good places to put cash that you need ready access to for bill paying or emergencies.
Money market mutual funds
- Money market funds are mutual funds that invest in short-term debt securities with low credit risk. There are 3 main categories of money market funds—government, prime, and municipal.
- Liquidity and flexibility: Government funds, including US Treasury money market mutual funds, are priced and transact at a stable $1.00 price per share or net asset value (NAV) and are not subject to the potential restrictions on withdrawals such as liquidity fees or redemption gates.
- Insurance: Money market funds are not insured by the FDIC. The Securities Investor Protection Corporation (SIPC) provides insurance for brokerage accounts that hold money market funds. SIPC protects against the loss of cash and securities—such as stocks and bonds—held by a customer at a financially troubled SIPC-member firm. SIPC protection is limited to $500,000 and has a cash limit of $250,000. SIPC does not protect against declines in the value of your securities and is not the same as FDIC protection.
- Uses: Money market funds can offer easy access to your cash and may make sense as places to put money you might need on short notice, or that you are holding to invest when opportunities arise.
Certificates of deposit
- CDs are time deposit accounts issued by banks in maturities from 1 month to 20 years. When you buy a CD, you agree to leave your money in the account for a specified period of time. In return, the bank pays you interest at a rate that is fixed at the beginning of that time period.
- Liquidity and flexibility: It makes sense to hold CDs until maturity. If you own a CD in a brokerage account and need access to your savings before maturity, you might have to sell it for a loss and also pay transaction fees. One way to improve access to your money and avoid fees with CDs may be by building what is known as a ladder.
- Insurance: CDs are eligible for FDIC insurance. A brokerage account can aggregate brokered CDs from different FDIC banks in one account, so you may be able to put more than $250,000 in CDs without running into the FDIC insurance limit.
- Uses: Because they should be held for specific lengths of time, CDs are more useful for earning yields and preserving cash rather than for holding cash that you may need to access before the CD matures.
Individual short-duration bonds
- If you have cash that you don't need access to immediately, you may want to consider putting some in short-duration bonds, which carry slightly more credit or interest rate risk than savings accounts, money markets, or CDs while potentially offering more return.
- Liquidity and flexibility: You can sell your bonds before maturity if you choose. However, you may not be able to find a buyer, forcing you to accept a lower price if you need to sell your bond. If interest rates rise, the price of your bond will fall, so if rates have gone up since you bought your bond, you may experience a loss if you sell it before maturity.
- Insurance: SIPC insurance is available for brokerage accounts that hold bonds, subject to the limits previously mentioned.
- Uses: Short-term bonds' prices can rise and fall more than those of other cash alternatives, so they are more useful for those seeking income over the longer term than for holding cash that you may need soon.