When it comes to saving and investing, cash is controversial. Some say cash is king and key to financial security. Others say cash is trash, that cash and cash equivalents simply can’t earn enough over the long-term to protect against inflation risk.
What’s often lost in any kind of debate is that there can be a middle ground. And in this case, what works within an overall financial plan or provides peace of mind is different for everyone. It’s all about balance and what’s best for you.
For most people, cash equals comfort—it’s reliable and ready when you need it. You might not want to keep a stash of cash hidden under your mattress, but it can be a good goal to include it—in some form—in your savings strategy.
Types of Cash Equivalents
Cash equivalents are a type of asset that can easily be converted to cash, so they’re useful if you get in a pinch. It usually grows in value but at a much slower rate than less-conservative investments because your money is at far less risk. Here are some cash equivalent examples and their pros and cons:
Certificates of Deposit
With a CD, 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.
The longer the term of the CD, the more interest it pays—and that used to mean a pretty decent return on a safe investment. But when the U.S. is in a low-interest-rate environment —as it has been for nearly a decade—CDs aren’t nearly so appealing.
The reward may not be worth tying up your money for so long. And if you have to cash in your CD ahead of time, you’ll likely pay a penalty .
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.
U.S. Treasury Securities
U.S. Treasury Securities are another popular conservative investment. Treasury bonds usually mature in 10 years or more, but notes are issued for terms of two to seven years, and bills are payable in a year or less. All are considered safe because they’re backed by the U.S. government.
And because Treasuries are so popular, the market is active, so they’re easy to sell if necessary. Still, Treasuries are affected by other types of risk, including inflation and changing interest rates. In today’s rising-interest-rate environment, that could be a drawback.
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.
Money Market Funds
Don’t confuse these funds with money market deposit 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 considered safe.
But unlike a savings or money market deposit account, they’re not federally insured. Which 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. (You might even have had one when you were a little kid.) When you deposit your money in a member-FDIC bank 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 savings account is usually the low man on the totem pole when you compare the interest rate offered to those of other bank products. A money market account is also FDIC-insured, so it’s safe, and it pays interest like a savings account—but usually at a higher rate if you keep a higher balance. If your balance drops below a specified minimum, you might end up paying a monthly fee.
What’s Best for You?
How you decide to allocate the assets in your investment savings (401(k), IRA, or brokerage accounts), will be based on several factors, including your age, your tolerance for risk, and what your long-term goals are.
Conservative investors have come to rely on cash equivalents, especially if their primary goal is keeping their money safe. Aggressive investors, on the other hand, can’t imagine pulling money away from the bigger, faster, stronger potential of the stock market.
But many financial advisors agree that you also should hold an ample amount of cash outside your investment portfolio for monthly expenses (budgeted and otherwise) and an emergency fund.
Experts from Dave Ramsey to Suze Orman regularly preach about putting money away in case you hit a financial rough patch. How much that emergency fund should be depends on your income and other details unique to you. (The most-often cited rule of thumb is enough to cover six months of living expenses.)
Maybe it will pay for damage to your home or car. Maybe you’ll have your hours cut at work or lose your job. Maybe you or your pet will get sick and need treatment. Doesn’t matter. You’ll increase your chances of being ready.
• And that means you’ll want your fund to be:
• immediately accessible, no matter where you are;
• in an account that’s safe;
• that doesn’t have any minimums, limits, or fees;
• but does have an interest rate that rivals less-flexible cash equivalents.
If that’s what you’re looking for, SoFi Money™ could be your answer. With this hybrid account, your money will be available when you need it for all your expected expenses (your car payment, cable bill, pizza on Friday nights) and any other little thing that comes along.
With SoFi Money, you’ll also have the same easy access for unplanned costs. Your money will be earning a competitive interest rate. And SoFi won’t charge account fees. You’ll also get other perks to help keep your finances on track—whether you’re spending or saving. With the SoFi app, you can monitor your weekly spending and how you’re doing with your budget.
Your SoFi Money debit card will work at any ATM and offers fraud protection to keep your money safe. And your account will be FDIC-insured. Plus, you can count on SoFi’s customer service reps to help you with any questions or concerns.
Financial security is all about balance and meeting your goals—including finding that sweet spot of having enough for daily expenses, monthly bills, a little fun, and those blindsiding worst-case scenarios that can throw your budget completely off track.
Whether you’re just starting out or you’re gearing down on the road to retirement, having a deposit account that’s flexible should be on your checklist. A SoFi Money account can be an important part of a financial plan that gets you where you want to go.
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The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .