Making the Most of Your Uninvested Cash
Published Sept. 3, 2024
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Investing is the best way to grow your money over a long period. If you're saving for retirement, putting your cash into the stock market can generate returns beyond what you'll get in a savings or other bank account.
But not all of your money necessarily belongs in a brokerage account. For example, you likely have emergency savings and other cash for shorter-term goals, or even just money that you're deciding what to do with. You don't want to just leave this money sitting in a checking account that earns no interest, where it will lose buying power.
Here's a closer look at your options for making the most of this uninvested cash -- namely, accounts offering high returns and minimal risk of loss.
A high-yield savings account is a great place for your emergency fund, and it can keep your cash from losing buying power due to inflation. Plus, you'll benefit from FDIC protection for your money.
Keeping cash out of the market has perks and drawbacks worth considering.
Here are a few options to earn interest on your uninvested cash and minimize the risk of loss in the process, thanks to FDIC insurance. This means up to $250,000 (and sometimes more) per depositor, per FDIC-insured bank, per ownership category is protected from bank failure.
For the ultimate in ease of use, consider a savings account. Specifically, you'll want a high-yield savings account, and those are commonly offered by online-only banks. (They have lower overhead costs than traditional banks and can pass the savings on to account holders in the form of higher APYs and fewer fees.)
The current average rate across all savings accounts is 0.38%, but you'll find banks offering HYSAs that pay much more than that -- as of this writing, 10 times as much or more. Just remember that savings account rates are variable and can change at any time.
You likely won't have direct access to your money with an online HYSA, and will need to transfer it to another bank to withdraw it, but with some advance planning, that shouldn't pose a problem. If you put $10,000 into a savings account paying 4.00%, you'll earn about $400 on it within a year, assuming that rate remains the same and you don't deposit more or withdraw any money.
Want to earn interest on your money and also have it available to you in one step? A money market account could be just the ticket, and the ones paying rates comparable to HYSAs are also offered by online banks.
Money market accounts have features of both savings and checking accounts -- namely, the higher APY of a savings account and the cash access of a checking account. You'll likely receive a debit card with your new MMA, and possibly also check-writing privileges.
A money market account can be a good bet if you know you'll need to use some of your uninvested cash to cover bills or other expenses. Note that some MMAs have higher minimum opening deposit or balance requirements than savings accounts.
Let's say you want to earn a set and predictable return on your cash. A certificate of deposit could be the right fit for your needs, provided you can leave your money alone for the duration of its term. Thankfully, you have options here -- common CD terms range from three months to five years.
Lock in one of the best CD rates, and no matter which way the interest environment goes, you'll know your rate is guaranteed for the term. If you've got $10,000 and put it into a 3-year CD with a 4.00% APY, you'll wind up earning more than $1,200 on it over those three years.
Just beware of early withdrawal penalties -- don't open a CD with your cash unless you're sure you won't need to withdraw your money early. One way to avoid this is to ladder your CDs, meaning opening multiple CDs with different terms, so you have cash freeing up at regular intervals.
If you'd like to keep your cash with your brokerage firm rather than a bank (if your broker doesn't also offer traditional bank accounts -- some do), look for a cash management account (CMA). CMAs are financial accounts offered by non-bank financial entities, and they offer features you'd find with a checking or savings account at a bank.
Those features can include a debit card to make cash withdrawals or purchases, check-writing privileges, and money transfers between financial institutions. You might also earn a high APY on your uninvested cash in a CMA -- perhaps comparable to what the best high-yield savings accounts offer.
CMAs are offered by financial apps, robo-advisors, and brokerages in partnership with chartered banks, to ensure your money in one is covered by FDIC insurance (and often they have higher limits than the standard $250,000 if multiple banks are involved). In most cases, you have to be a brokerage customer to use a cash management account with that broker.
The best cash management accounts offer high APYs and easy cash access. Plus, they don't charge monthly maintenance fees or have minimum balance requirements.
Keeping some of your cash uninvested can be good for your finances and also your peace of mind -- if you need access to money in a hurry, you won't have to sell investments and potentially lock in a loss if their value happens to be down. Plus, you have the flexibility to use that cash to invest at any time.
Consider all the features of the above types of accounts to choose the right one for your needs.
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