How your cash can work harder for you

Cash is a core holding for everyone, but did you know there are ways you can hold it that might help it work harder for you? For years, interest rates have been too low for people to do more than simply leave cash in a checking or savings account. But as rates have recently risen and normalized, many investors are finding themselves rethinking where they park their cash.

Depending on what your needs are, both near term and long term, there might be ways your cash could be working harder toward your goals. Aligning them appropriately will help you strike the right balance.

Cash for everyday expenses

The first bucket of cash most people think about is cash they need for day-to-day expenses. Since you’ll be using this money in the foreseeable future, it’s important that you can access it when you need it. This is why keeping this bucket of cash in your deposit account makes a lot of sense.

How much you hold in your account will vary depending on things like your budget and how steady your income is (for example, is there seasonality in your income?). You’ll probably also want to have a buffer beyond your monthly expenses to ensure your regular expenses will always be covered, particularly if you have them on auto-pay through your account. When thinking about this amount, don’t forget to also budget for any annual and quarterly payments you may make.

Emergency savings

This is money held aside for emergencies and the unforeseen. This is a safety net in case something happens and a common rule of thumb is it should cover three to six months of your living expenses. It’s important to keep this money easily accessible, so a deposit account is fine, but since you don’t expect to access it right away, there might be ways to earn a little more on it.

For example, money market funds are mutual funds that invest in highly liquid fixed income securities that offer daily liquidity, aim to maintain price stability and pay the interest earned on its holdings to the investor. Other potential options include certificates of deposit (CDs) or U.S. Treasuries maturing within one year (to minimize price fluctuations). There are pros and cons to each but the idea here is to ensure you can access the money when you need it.

“Sleep at night” cash

Depending on your circumstances, you might also choose to have some money set aside to help you sleep better at night. The idea is that this cash is meant to ease any qualms or worries you might have, whether that’s related to concerns about the economy, uncertainty about your job situation or stress about potential expenses you want to be prepared for.

As you think about this bucket, consider if some of it is already covered by your emergency savings. As for where to park it, how much you want to reach for yield depends on your comfort level – remember, the goal here is to sleep well at night. For some, that’s in their deposit account. Others may be fine with short-term fixed income options that might fluctuate a little with markets but historically have not been particularly volatile.

Short-term goals or major purchases on the horizon

Are you planning on making any large purchases in the next one to three years? If so, you have even more options available to you. While you want to ensure you can access the money when you need it, you’ll have time working on your side so investments like bonds or CDs that mature just before you need the money might help you earn more while you wait.

What about what’s left? Consider earmarking it for long-term goals

What’s remaining is money that could be put to work for long-term goals like funding retirement or a child’s college education. If you’re not ready to put it all to work right now, a phase-in plan where you regularly add set amounts over time might help you get started. With that in mind, even your dry powder could be invested in something that makes it work for you while you put your plan in place or decide on what investments you want to buy.

If you are confident you’ll be using the money shortly, keeping it in cash might make the most sense. But if the timing is further out or less clear, think back to your options for emergency savings or sleep at night cash – those options might also help you balance earning something on the cash while providing quick access for when you’re ready to use it.

The bottom line

Everyone needs to keep cash on hand – thinking about it intentionally can help you make the most of it while you work on your long-term goals.

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