Where to invest cash to boost its yield

The phrase “cash is king” has some merit, and having a healthy balance in your checking or savings account and maintaining an emergency fund is sound financial advice.

That said, building long-term wealth may depend on utilizing a range of investment options with more potential to grow than relying solely on money kept in a traditional savings account.

If you have excess cash in a checking or savings account, you may find yourself wondering how to invest the cash in a relatively risk averse way that would keep it relatively liquid while potentially growing your money faster than you could with a traditional savings account.

There are a number of financial products that might pay attractive rates on your cash with little risk. Once you know the characteristics of these different options, it will be easier to make an informed choice about the most advantageous way for you to invest your excess cash in order to best meet your needs.

Of note, the options this article covers are lower risk investment options that are relatively liquid. There are other investment options for cash – like stocks – but these options often come with more risk. If you have a longer time horizon or the ability or want to take on more risk, you may desire to consider some of the other investment options out there beyond what’s covered below. If you need guidance on where to invest your cash, consider reaching out to a J.P. Morgan advisor to create a personalized strategy today.

High-yield savings account

Through your brokerage or wealth management firm, you may be able to find a high-yield savings bank or money market account that pays competitive rates on your cash deposits.

Generally, these products or accounts enjoy the same protection from the Federal Deposit Insurance Corporation (FDIC) as traditional bank savings products but often provide a more competitive interest rate.

You may need to make a larger initial deposit compared to a regular savings account to access this offering, but the payoff for storing your money in one of them rather than in a traditional savings account may be positive. Many of these accounts may also allow you to make a certain number of monthly withdrawals if you need to access funds.

Bank certificates of deposit (CDs)

Bank certificates of deposit (CDs) are a type of FDIC-insured deposit product, opened through your bank, that holds a fixed amount of money for a fixed period of time. In return, the CD holder will earn interest on the deposit over that fixed period of time. Once the CD reaches maturity, the CD holder also receives their principal amount in full. If you withdraw the money before maturity, a penalty may apply.

If you have cash on hand that you don’t require overnight access to, you may benefit from a higher rate than you would earn on a more liquid savings account. In addition, CDs can be particularly advantageous when interest rates are headed lower because they allow you to lock in higher yields for a fixed period of time.

Brokered CD

Beyond traditional bank CDs, there is another type of CD that can be purchased within a brokerage account, known as a brokered CD. Brokered CDs may offer higher yields and more flexibility than traditional bank CDs.

It’s important to note that brokered CDs do come with increased complexity and risks, including early withdrawal fees and call features where the issuing bank may redeem the CD before maturity. When investors are looking for liquidity on brokered CDs prior to their maturity, they are subject to market pricing which can be higher or lower than the initial investment, which is also something to be aware of. All of which is to say, make sure to weigh all of the pros and cons involved with brokered CDs.

Treasuries

Considered low-risk investments because of their backing by the U.S. government, Treasuries could represent another place to park your cash. Although you can invest in government bonds over the long term, Treasury bills (“T-bills”) may be a particularly suitable place to store some cash because they mature within one year of being issued. In other words, T-bills could generate lower-risk yield without tying up your funds for an extended period.

Money market funds

Another investment-based option for excess cash may be a money market fund. A money market fund is a type of mutual fund that invests in low-risk securities. Some, but not all, aim to maintain a net asset value (NAV) of $1 per share, distributing any excess profits as dividends to shareholders.

In many cases money market funds invest in government securities, tax-exempt municipal securities and corporate and bank debt securities. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency; however, investors may be offered some protection by the non-profit SIPC.

Short-term bond funds

Another option you may want to consider if you have the bandwidth to invest cash for a longer period (say, a few years) is a short-term bond fund. While there is some risk with these funds (and more risk than FDIC-insured options), they’re usually considered relatively safe.

Short-term corporate bond funds invest in corporate bonds with maturities of generally less than five years. These funds aim to provide income and capital preservation by holding debt securities issued by companies. They are often considered less risky than longer-term bond funds due to their shorter maturity, making them more stable in volatile markets. Common risks associates with these funds include interest rate risk and credit risk.

Short-term government bond funds are mutual funds or exchange-traded funds (ETFs) that invest in bonds issued by the U.S. government, with maturities typically ranging from one to three years. These funds may offer a relatively safe way to invest, as they are backed by the full faith and credit of the government. Common risks for these funds include inflation related risks and market risks.

The bottom line

While cash may not offer the highest growth potential for long-term wealth accumulation, it can serve as a stable foundation in your investment portfolio. To enhance the returns on the excess cash you hold, consider exploring higher-yield options such as money market funds or CDs, or seek out other products that align with your risk tolerance and investment timeline.

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