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You may give little thought to the Federal Reserve, but the Fed looms large over your life as you borrow, save, spend, and invest.

The Fed’s mission is to control inflation and maintain maximum employment. The goals can be at odds with each other.

Let’s look at the Federal Reserve’s origin story and what the central banking system is currently up to.

How It All Began

A secret meeting in 1910 on an island off Georgia laid the foundation for the Federal Reserve. After a series of financial panics and recessions in the Gilded Age, six men gathered at the Jekyll Island Club to write a plan to reform the nation’s banking system.

At that time, U.S. banks held large reserves of cash, but they were scattered. During a crisis, the reserves would be frozen. In addition, the supply of currency was inelastic and supplies of gold limited. And U.S. banks could not operate overseas.

The Panic of 1907 — a worldwide financial crisis surpassed only by the Great Depression — galvanized Congress, and particularly Senate Finance Committee Chairman Nelson Aldrich. In the fall of 1910, Aldrich and his Jekyll Island colleagues developed a plan for a central bank with 15 branches. The national body would set discount rates for the system and buy and sell securities.

Political wrangling ensued, but Congress passed, and President Woodrow Wilson signed the Federal Reserve Act in 1913. The bill resembled the Aldrich plan.

The law called for a central banking system with a governing board and multiple reserve banks. The hybrid structure endures.

A golden factoid: Banking panics before 1913 tested the mettle of Manhattan banks, but what is now the most influential of the 12 reserve banks, the Federal Reserve Bank of New York, is home to the world’s largest gold storage reserve, with about 500,000 gold bars owned by the U.S. government, foreign governments, other central banks, and international organizations.

The First Century of the Federal Reserve

Before the Fed was born, financial panics caused by speculation and rumors led to the call for a central banking authority that would support a healthier banking system.

World War I, 1914 to 1918

The Federal Reserve Board and the 12 reserve banks were just getting organized as war broke out in Europe. But once the nation entered World War I, the Fed quickly became a major player by supporting the U.S. Treasury’s war bond effort and offering lower interest rates to member banks when the proceeds were used to buy bonds.

The Fed also gave better interest rates to banks purchasing Treasury certificates. Lower rates led to increased borrowing by businesses and households, which stimulated economic growth. But the increased money supply eventually led to rising prices. When the war ended, the Fed took action to control that inflation.

Stock Market Crash of 1929

On Oct. 28, 1929, now known as “Black Monday,” the Roaring Twenties ended with a thud when the Dow Jones Industrial Average dropped nearly 13%. The market collapsed the next day. It was the most devastating stock market crash in U.S. history.

Many economists and historians blame the Fed for the crash because of its decision to raise interest rates in 1928 and 1929 to control over speculation (what today might be called “irrational exuberance”) in the stock market.

Leaders decreased the money supply starting in 1928 and pressured member banks in 1929 to rein in their loans to brokers and charge a higher rate on broker loans.

The Great Depression, 1929 to 1941

The deepest downturn in U.S. history lasted from 1929 to 1941. The contraction began in the United States and reverberated around the globe.

The banking panics in 1930 and early 1931 were regional, but in late 1931 the commercial banking crisis spread throughout the nation. The Fed’s efforts to contain the collapse were not enough, and the situation reached rock bottom by March 1933.

On March 6, 1933, President Franklin Roosevelt — who’d been inaugurated just two days before — announced a weeklong suspension of all banking transactions. Legislative intervention soon followed.

In 1933 the Glass-Steagall Act separated commercial and investment banking and gave the federal government and Federal Reserve enhanced powers to deal with the economic crisis, which led to the creation of the Federal Deposit Insurance Corp. and regulation of deposit interest rates. (At an FDIC-insured bank today, deposits are insured up to $250,000 per depositor, per institution, and per ownership category.)

The Banking Act of 1935 gave the Fed more independence from the executive branch; shifted power from the regional reserve banks to the Board of Governors, based in Washington, D.C.; and led to the modern form of the Federal Open Market Committee (FOMC), the Fed’s main monetary policymaking committee, which consists of the Fed governors in Washington and the presidents of the 12 regional banks.

World War II, 1941 to 1945

The Fed’s role during World War II was similar to its role in World War I. Its main mission became financing the war, and it helped the Treasury Department market war bonds in cooperation with commercial banks and businesses.

The reserve banks also reduced their discount rate to 1% and set a rate of half a percentage point for loans secured by short-term government obligations. During the war years, the Fed kept its eye on inflation by regulating consumer credit. It required large down payments and shorter terms on loans used to buy a variety of consumer goods.

Korean War, 1950 to 1953

At the start of the Korean War, inflation was a growing concern. But the Fed was once again under pressure — this time from the Truman administration — to help finance the war effort.

In February 1951, the Fed declared its independence in fiscal matters, and in March, the Treasury and the Fed announced that they had reached an accord on how they would handle “debt management and monetary policies” going forward.

The Great Inflation, 1970s and ’80s

Keeping inflation under control has always been an important role for the Fed, but in the 1970s, when the stock market slumped and the country found itself in an inflation crisis so deep it was known as the “Great Inflation,” it became a special challenge.

Check the history books and you’ll find plenty of finger-pointing. It was President Richard Nixon’s fault for disengaging from the gold standard. Or maybe it was the Fed’s fault for employing a confusing stop-go monetary policy that had interest rates going up, then down, then back up.

Then new Fed chairman, Paul Volcker, took over in 1979 and switched the Fed’s goal from targeting interest rates to targeting the money supply. It was painful. The prime lending rate (the rate banks offer their most creditworthy customers when they’re looking to take out a line of credit or a loan) skyrocketed to over 21% at one point.

Unemployment reached double digits in some months. The country went through two recessions. But eventually, prices stabilized.

And the federal funds rate hasn’t been in the double digits since the mid-1980s.

The Great Recession, 2007 to 2009

When a period in U.S. history is labeled “great,” it’s often anything but. During the Great Recession, home prices fell. Unemployment rose. Gross domestic product fell. And in 2008, the market crashed.

Home prices had peaked at the beginning of 2007, and the subprime mortgage market had been busy.

This recession was, for many Americans, the worst of times; they lost their jobs, their homes, and their confidence in the economy.

Enter the Fed, which started by tackling the slump with a traditional response: From September 2007 to December 2008, the Fed lowered the federal funds rate from 5.25% to zero to 0.25%, and FOMC policy statements noted that it would be keeping the rate at exceptionally low levels for a while. But it didn’t stop there.

In 2008 it also began its first round of quantitative easing, buying $600 million in mortgage-backed securities, and continued that effort in 2009. Also in 2008, President George W. Bush signed the $700 million Troubled Asset Relief Program into law. Two more rounds of quantitative easing started in 2010 and 2012 under President Barack Obama.

Recommended: Common Recession Fears and How to Cope

The Covid Crisis, the Fed, and Inflation

At the onset of the Covid-19 pandemic and resulting recession in 2020, making sure the U.S. economy did not fall into a prolonged recession became a higher priority than maintaining inflation at the Federal Reserve’s 2% target rate.

The Fed seeks to control inflation by influencing interest rates. When inflation is too high, the Fed typically raises its benchmark interest rate to slow the economy and tame inflation. When inflation is low, the Fed often lowers the federal funds rate — the interest rate that banks use when they lend money to one another overnight — to stimulate the economy.

After keeping the rate near zero, in March 2022, the Fed approved its first rate increase in more than three years. Between March 2022 and July 2023, the Fed raised rates eleven times, the fastest tightening campaign since the 1980s. The Fed held rates at 5.25% to 5.50% from July 2023 to September 2024. Then as the cuts seemed to achieve their goal, inflation slowed. Inflation, as evidenced by the Consumer Price Index (CPI), peaked in June 2022 and has improved since then. The most recent CPI data, for the 12 months ending in September 2024, showed inflation at 2.4%, close to the Fed’s 2% goal. Given this, in September 2024, the Fed decided it was time to begin cutting the rate. Some economists anticipate further cuts in 2025.

How the Federal Reserve Affects Your Finances

So how do the Fed’s decisions have an impact on you as an individual consumer? For one, banks base their prime rate on the federal funds rate; the prime rate is generally 3 percentage points higher. This rate in turn helps determine the rates that lenders offer their customers.

Fed rate hikes increase the cost of borrowing money for a mortgage or to pay for a car, or for carrying a credit card balance. Rate increases also create a more volatile stock market that could hurt 401(k) plans, increase the amount you earn on a CD, or affect what you might pay for a bond. (Fortunately there are some way to protect your money from inflation next time it rears its head. For example, if you can swing it, buying a house vs. being a renter may help protect you from inflation because you can lock in a fixed monthly payment long term. You can also read up on how to invest during a time of inflation.)

You may be scratching your head at why Fed rate cuts in the fall of 2024 didn’t immediately result in reduced interest rates on home mortgage loans. The short answer is that lenders look at multiple economic data points when they set rates, and the Fed’s action, while important, is not the only factor.

Prospective homebuyers may be wondering, is this a good time to buy a house? The answer is a very personal one, and chances are it won’t be found in scrutinizing the Fed’s movements. Emotions are also involved: Owning a home not only gives you a place where you enjoy living, but homeownership can help build generational wealth and some people may want to begin building that equity immediately, especially when future mortgage rates, like Fed rate cuts, are not within their control.

Recommended: What to Learn From Historical Mortgage Rate Fluctuations

The Takeaway

If you’re planning a vacation, you might not want to tuck away a book on the history of the Federal Reserve. (Or maybe you will. No judgment.) The Fed has a dual mandate to aim for maximum employment and price stability, and it has historically raised interest rates as the antidote for rising inflation.

If you find yourself musing about buying a home soon, it’s important to look at the history of mortgage rates to put the current conditions into context, and it helps to read up on the benefits of homeownership.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What is the prime rate?

The prime interest rate is the interest rate that banks charge the customers they consider to be the lowest risk — those who have a good credit history and are deemed least likely to default on a loan or miss payments.

What does the Federal Reserve do?

The Federal Reserve has several roles. It sets monetary policy, with a goal of maximum employment and stable inflation. It also regulates banks and other financial institutions. Its overall objective is to control risks to the economy and financial markets.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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SOHL-Q424-133

Home equity loans, home equity lines of credit (HELOCs), and cash-out refinances are all borrowing options that allow homeowners to access the equity they’ve built in their home. By tapping into home equity — the difference between a home’s current value and the amount still owed on the mortgage — homeowners can secure funds to meet other financial goals, such as making home improvements.

While these three types of loans do have similarities, there also are key differences in how each one works. Understanding the differences in a home equity loan vs. HELOC vs. cash-out refi can help you better determine which option is right for you.

Defining Home Equity Loans, HELOCs, and Cash-Out Refi

To start, it’s important to know the basic definitions of home equity loans, HELOCs, and cash-out refinances.

Home Equity Loan

A home equity loan allows a homeowner to borrow a lump sum that they’ll then repay over a set period of time in regular installments at a fixed interest rate. Generally, lenders will allow homeowners to borrow up to 85% of their home’s equity.

This loan is in addition to the existing mortgage, making it a second mortgage. As such, a borrower usually will make payments on this loan in addition to their monthly mortgage payments. To better understand what kind of payment might be due each month, it is helpful to use a home equity loan calculator.

HELOC

A HELOC is a line of credit secured by the borrower’s home that they can access on an as-needed basis, up to the borrowing limit. The amount of the line of credit is determined by the mortgage lender and based on the amount of equity a homeowner has built, though it can be up to 90% of the equity amount. Like a home equity loan, this is a second mortgage that a borrower assumes alongside their existing home loan.

How HELOCs work is somewhat like a credit card, in that it’s a revolving loan. For example, if a borrower is approved for a $30,000 home equity line of credit, they can access it when they want, for the amount they choose (though there may be a minimum draw requirement). The borrower is only charged interest on and responsible for repaying the amount they borrowed.

Another point that borrowers should keep in mind is that there is a draw period of 5 to 10 years, during which a borrower can access funds, and a repayment period of 10 to 20 years. During the draw period, the monthly payments can be relatively low because the borrower pays interest only. During the repayment period, on the other hand, the payments can increase significantly because both principal and interest have to be paid.

Cash-Out Refinance

A cash-out refinance is a form of mortgage refinancing that allows a borrower to refinance their current mortgage for more than what they currently owe in order to receive extra funds. With a cash-out refinance, the borrower’s current mortgage is replaced by an entirely new loan.

As an example, let’s say a borrower owns a home worth $200,000 and owes $100,000 on their mortgage at a high interest rate. They could refinance at a lower interest rate, while at the same time taking out a larger mortgage. For instance, they could refinance the mortgage at $130,000. In this case, $100,000 would replace the old mortgage, and the borrower would receive the remaining amount of $30,000 in cash.

Recommended: First-time Homebuyer Guide

Home Equity Loans and HELOCs vs. Cash-Out Refi

Here’s a look at how a home equity loan vs. HELOC vs. cash-out refinance stack up when it comes to everything from borrowing limit to interest rate to fees:

Borrowing Limit

With a home equity loan, lenders generally allow you to borrow up to 85% of a home’s equity. HELOCs allow borrowers to tap a similar amount, sometimes as much as 90%. Cash-out refinances, on the other hand, have a slightly lower borrowing limit — up to 80% of a borrower’s equity. The exception is a VA cash-out refi; here it is possible to borrow up to 100% per VA rules, although some lenders may impose a lower ceiling.

Interest Rate

With a home equity line of credit, the interest rate is usually adjustable. This means the interest rate can rise, and if it does, the monthly payment can increase. Home equity loans, meanwhile, generally have a fixed interest rate, meaning the interest rate remains unchanged for the life of the loan. This allows for more predictable monthly payment amounts.

A cash-out refinance can have either a fixed rate or an adjustable rate. Homeowners who opt for an adjustable rate may be able to access more equity overall.

Type of Credit

Both home equity loans and cash-out refinances are installment loans, where you receive a lump sum that you’ll then pay back in regular installments. A HELOC, on the other hand, is a revolving line of credit. This allows borrowers to take out and pay back as much as they need at any given time during the draw period.

Fees

With a home equity loan, HELOC, or cash-out refinance, borrowers may pay closing costs. HELOC closing costs may be lower compared to a home equity loan, though borrowers may incur other costs periodically as well, such as annual fees, charges for inactivity, and early termination fees.

When It Might Make Sense to Borrow

A home equity loan vs. HELOC vs. cash-out refi have varying use cases. With a fixed interest rate, home equity loans can allow for predictable payments. Their lower interest rates can make them an option for borrowers who want to consolidate higher interest debt, such as credit card debt.

HELOCs, meanwhile, provide more flexibility as borrowers can take out only as much as they need, allowing borrowers to continually access funds over a period of time. A cash-out refinance can be a good option for a borrower who wants to receive a large lump sum of money, such as to pay off debt or finance a large home improvement project.

Which Option Is Better?

Like most things in the world of finance, the answer to whether a cash-out refinance vs. HELOC vs. home equity loan is better will depend on a borrower’s financial circumstances and unique needs.

In all cases, borrowers are borrowing against the equity they’ve built in their home, which comes with risks. If a borrower is unable to make payments on their HELOC or cash-out refinance or home equity loan, the consequence could be selling the home or even losing the home to foreclosure.

Scenarios Where Home Equity Loans Are Better

A home equity loan can be the right option in certain scenarios, including when:

•   You want fixed, regular second mortgage payments: A home equity loan generally will have a fixed interest rate, which can be helpful for budgeting as monthly payments will be more predictable. Some may appreciate this regularity for their second monthly mortgage payment.

•   You want to get a lump sum while keeping your existing mortgage intact: Unlike a HELOC, where you draw just as much as you need at any given time, a home equity loan gives you a lump sum all at once. Plus, unlike a cash-out refinance, you aren’t replacing your existing mortgage. That way, if the terms of your current mortgage are favorable, those can remain as is.

Recommended: The Different Types Of Home Equity Loans

Scenarios Where HELOCs Are Better

In the following situations, a HELOC may make sense:

•   You have shorter-term or specific needs: Because HELOCs generally have a variable interest rate, they can be useful for shorter-term needs or for situations where a borrower may want access to funds over a certain period of time, such as when completing a home renovation.

•   You want the option of interest-only payments: During the draw period, HELOC lenders often offer interest-only payment options. This can help keep costs lower until the repayment period, when you’ll need to make interest and principal payments. Plus, you’ll only make payments on the balance used. A HELOC interest-only repayment calculator can help borrowers understand what those monthly payments might be.

Scenarios Where Cash-Out Refi Is Better

Cash-out refinances can make sense in these scenarios:

•   You need a large sum of money: If there’s a need for a large sum of money, or if the funds can be used as a tool to improve your financial situation on the whole, a cash-out refinance can make sense.

•   You can get a lower mortgage rate than you currently have: If refinancing can allow you to secure a lower interest rate than your current mortgage offers, then that could be a better option than taking on a second mortgage, as you would with a home equity loan or HELOC. If interest rates have risen since you first took out your loan, however, a cash-out refi could mean paying more in interest over the life of the loan.

•   You want just one monthly payment: Because a cash-out refinance replaces your existing mortgage, you won’t be adding a second monthly mortgage payment to the mix. This means you’ll have only one monthly payment to stay on top of.

•   You have a lower credit score but still want to tap your home equity: In general, it’s easier to qualify for a cash-out refinance vs. HELOC or home equity loan since it’s replacing your primary mortgage.

The Takeaway

Cash-out refinancing, HELOCs, and home equity loans each have their place in a borrower’s toolbox. All three options give borrowers the ability to turn their home equity into cash, which can make it possible to achieve important goals, consolidate debt, and improve their overall financial situation.

Homeowners interested in tapping into their home equity may consider getting a HELOC or taking a cash-out refinance with SoFi. Qualifying borrowers can secure competitive rates, and Mortgage Loan Officers are available to walk borrowers through the entire process.

FAQ

Can you take out a HELOC and cash-out refi?

If you qualify, it is possible to get both a HELOC and cash-out refinance. Qualified borrowers can use their cash-out refinance to help repay their HELOC.

Is it easier to qualify for a HELOC or cash-out refi?

It is generally easier to qualify for a cash-out refinance. This is because the cash-out refi assumes the place of the primary mortgage, whereas a HELOC is a second mortgage.

Can you borrow more with a HELOC or cash-out refi?

Ultimately, the amount you can borrow with either a cash-out refi or HELOC will depend on how much equity you have in your home. That being said, a HELOC can offer a slightly higher borrowing limit than a cash-out refi, at up to 90% of a home’s equity as opposed to a top limit of 80% for a cash-out refinance.

Are HELOCs or cash-out refi tax deductible?

Interest on your cash-out refinance or HELOC can be tax deductible so long as you use the funds for capital home improvements. This includes projects like remodeling and renovating.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q424-144

For many people, cash and cash equivalents are highly liquid assets that can help offset risk in a financial plan or investing portfolio. Cash equivalents are low-risk, low-yield investments that can be converted to cash quickly and are thus considered relatively stable in value.

For companies, though, cash and cash equivalents (CCE) refers to an accounting term. Cash and cash equivalents are listed at the top of a company’s balance sheet because they’re the most liquid of a company’s short-term assets. A company’s cash on hand can be considered one measure of its overall health.

It’s important for people to understand the role of cash and cash equivalents in their own asset allocation.

What Are Cash and Cash Equivalents?

People keep their money in a variety of accounts and investments. For example, you might keep cash on deposit at a financial institution in a checking account, savings account, or certificate of deposit (CD).

Investments, on the other hand, may include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate holdings, and more. Many investments fluctuate in value, and some investments can be quite volatile.

For that reason, people also tend to keep a portion of their portfolio in cash or cash equivalents, because while cash doesn’t typically grow in value, it also typically doesn’t fluctuate or lose value (although periods of inflation can take a bite out of the purchasing power of cash).

Cash refers to the funds in any account that are available for immediate use. Cash equivalents are short-term investment vehicles that can be converted to cash very quickly, or even immediately.

Difference Between Cash and Cash Equivalents

The primary difference between cash and cash equivalents is that cash equivalents are investment vehicles with a specified maturity. These can include certificates of deposit (CDs), money market accounts, U.S. Treasuries, and other low-risk, low-return investments.

If you’re considering opening a checking account, you wouldn’t be thinking about cash equivalents, but rather getting the best terms for the cash in your account. If you’re looking for added stability in an investment portfolio, you may want to consider cash equivalents.

How Do Cash Equivalents Work?

As noted above, the idea behind a cash equivalent is that it can be converted to cash swiftly. So the maturity for cash equivalents is generally 90 days (3 months) or less, whereas short-term investments mature in up to 12 months.

Cash equivalents have a known dollar amount because the prices of cash equivalents are usually stable, and they should be easy to sell in the market.

Types of Cash Equivalents

There are a number of cash equivalents investors can consider. Some offer higher or lower potential returns, and a wide variety of terms.

Certificates of Deposit (CDs)

Investing in a certificate of deposit, or CD is like a savings account, but with more restrictions and potentially a higher yield. With most CDs, you agree to let a bank keep your money for a specified amount of time, from a few months to a few years. In exchange, the bank agrees to pay you a guaranteed rate of interest when the CD matures.

If you withdraw the money before the maturity date, you’ll typically owe a penalty.

The longer the term of the CD, the more interest it typically pays, but it’s important to do your research and find the best terms.

CDs are similar to savings accounts in that you can deposit your money for a long period of time, these accounts are federally insured, so they’re considered safe. But you can’t add or withdraw money, generally speaking, until the CD matures.

There are a few different kinds of CDs that offer different features. Some bank CDs have variable rates that allow you to change the rate once during the term. There are also brokerage CDs, which are marketed as securities and sometimes sold by banks to investment companies.

Owing to their lower-risk profile and modest but steady returns, allocating part of your portfolio to CDs can offer diversification that may help mitigate your risk exposure in other areas.

Note that a CD that does not permit withdrawals, even with the payment of a penalty, can be considered an unbreakable CD. As such, it wouldn’t be considered a cash equivalent because it cannot readily be converted to cash.

US Treasury Bills

U.S. Treasury Securities are another type of conservative investment. They’re a type of bond or debt instrument, and they’re backed by the U.S. government.

Treasury bonds (T-bonds) usually mature in 20 or 30 years, but treasury bills or T-bills can be purchased with terms that range anywhere from a couple of days to a few weeks to a year.

Because Treasuries are popular, the market is active and they’re easy to sell if necessary. Still, Treasuries are affected by other types of risk, including inflation and changing interest rates.

While investors can expect to receive interest and principal payments as promised at maturity, if they attempt to sell the bond prior to maturity, they may receive more or less than the principal depending on current market conditions.

Other Government Bonds

Other government entities, including states and municipalities, may offer short-term bonds that could be considered cash equivalents. But investors must evaluate the creditworthiness of the entity offering the bond.

Money Market Funds

Don’t confuse money market funds and money market accounts. Money market funds invest your money, then pay a portion of the earnings to you in the form of dividends.

Because the funds’ short-term investments generally mature in less than 13 months, they’re generally considered very low risk. But unlike a savings or money market deposit account, they’re not federally insured. That means there’s no guarantee you’ll make back your investment, and it’s possible to lose money in a volatile market.

Savings and Money Market Accounts

A savings account has long been an essential money management tool. When you deposit your money in an FDIC-insured savings account, the Federal Deposit Insurance Corporation (FDIC) insures it up to the maximum amount allowed by law, so you can be sure your money is secure. Another bonus: You can make regular deposits and withdrawals (within federal limits) without committing to a term length or worrying about withdrawal penalties.

But a standard savings account could be a lower priority when you compare the interest rate offered to those of other bank products and cash equivalents. A high-yield savings account at an online bank or a money market account could also be FDIC-insured, so it’s safe, and pays more interest. However, in some cases, if your balance drops below a specified minimum, you might end up paying a monthly fee.

Commercial Paper

Commercial paper refers to short-term debt issued by a corporation. These bonds carry different terms, maturity dates, and yields. Some can be considered cash equivalents.

Cash and Cash Equivalents vs Short-Term Investments

Investors might also consider including some short-term investments in their asset allocation as well, as these investments can offer higher returns vs. cash equivalents. The goal of short-term investments is to generate some return on capital, without incurring too much risk.

Short-term investments are also sometimes called marketable securities or temporary investments. Some include longer-term versions of the cash equivalents listed above (e.g. CDs, money market funds, U.S. Treasuries), and are meant to be redeemed within five years, but often less.

The Takeaway

Cash and cash equivalents perform an important role in many investors’ portfolios. These assets are considered highly liquid and less likely to fluctuate in value, especially when compared with equities and other securities that offer more growth potential, but more exposure to risk.

If you’re looking for ways to add to your cash holdings, it can also be wise to review your current banking partner.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is a cash and cash equivalent example?

Cash equivalents are low-risk, low-yield investments that can be converted to cash quickly and are thus considered relatively stable in value. They can include bank accounts and some securities, such as short-term government bonds.

What asset class are Treasuries?

Treasury bonds (T-bonds) are one of four types of debt that are issued by the U.S. Department of the Treasury. These bonds are used to finance the U.S. government’s spending activities. The four types of debt are classified as Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS).

How do you determine cash and cash equivalents?

To determine cash and cash equivalents, add up cash balances and short-term investments.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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