- Interest rates have moved higher in recent years, changing the potential opportunities for cash holdings. Choosing the right option for cash depends on your goals, attitude, and needs.
- Higher yields exist, but may require you to accept tradeoffs, like fluctuations in the returns of your investments.
- Money markets have lower earning potential than CDs or bonds, but can offer easy access to your savings and quick adjustments when rates change.
- Short-term CDs and short-duration bonds may provide higher yields than the average savings account, but come with different risks.
If you are like most people you probably have some money in a checking account for your spending needs, some cash on hand for major purchases that are coming up, and maybe some other funds that you are holding onto, waiting to find the right investment.
If you do have money in cash, you should consider your options. Interest rates have moved up significantly for some types of investments in recent years, but the average savings account still pays barely any interest.1 While rates are still low, choosing a higher-yielding home for some of your cash could make a meaningful difference. If you have $50,000 in cash for the next 3 years, the difference between the average savings account, and some higher-yielding options could be thousands of dollars (see table).
Before you move your cash to find the highest yield—meaning the amount of income relative to the amount invested, be sure to consider the tradeoffs that come with these other options. For instance, CDs and bonds might come with less liquidity, meaning you have to wait for a set period of time, accept the price a buyer is willing to pay to get your cash, or pay a fee that could impact your expected return. Finding an appropriate choice depends on your situation.
|Savings account||High-yield savings account||Prime money market||CDs||2-year Treasury|
Savings accounts and high-yield savings accounts data from BankRate. All other yields based on Fidelity.com data. All returns are hypothetical, assume a $50,000 initial investment and that July 2018 rates hold steady for the investment period and ignore any taxes or fees. Returns for money market and savings account compounded biannually. For illustration only. CD and Treasury bonds assume a 3-year maturity and compounding or reinvestment.
First consider your goals
Before you look for higher-yielding options, take a second to reconsider the role of your cash in your financial plan.
|The goal: Everyday expenses||The goal: Emergency fund|
|The goal: Near-term savings target||The goal: Low-volatility, "short-term" allocation in long-term portfolio|
To get a better sense of the tradeoffs for these options, consider the following pros and cons.
High-yield savings accounts
While traditional savings accounts offer very little interest these days, some banks offer higher-yielding savings options.
Yield: In some cases, the yields are as high as 1.9%.
Liquidity: These accounts come with high liquidity—you can access your savings without having to find a buyer as you would with a stock and there is no set time you have to keep your money in the account.
Protection: These accounts offer full FDIC protection—which means the government would protect you from losses due to the bank. The FDIC protection covers up to $250,000 per person, per bank, for a given ownership category. (See "Insurance for your cash" for details.) Some brokers offer cash management accounts, which aggregate FDIC protection. For instance, Fidelity’s cash management account sweeps balances into accounts at up to 5 partner banks, aggregating up to $1,250,000 of FDIC protection.2
The details: While a high-yield savings account can allow you to access your cash, it may not be the same setup as your corner bank. Some of these accounts are offered online only, and some may not offer ATM access. You need to be aware of fees, which could eat into your interest, and account minimums, which can be required for the best rates. It makes sense to shop around. Also, the FDIC insurance limit per account may require you to spread your money across accounts at several banks to achieve insurance protection for all of your savings.
Money market mutual funds
Money market funds offer easy access to your investment and low risk. Held in your brokerage account, they may come with checkwriting and ATM card access similar to a savings account, making these investments a good option for funds you may need in a hurry. And, as interest rates rise, those higher rates typically pass through to money market funds quickly. For example, as rates rose over the last year, money market fund yields more than doubled, far outpacing the increase in savings accounts.3
Yields: As of July 11, yields on some prime funds offered on Fidelity.com, which primarily invest in riskier corporate debt and may pay higher yields, ranged from 1.85% to 2.09% for a minimum initial investment of $2,500 to $1 million or more.
|Average yield (7-day yields)|
Source: iMoneyNet, as of July 11, 2018. Yields show the average 7-day yield for money market mutual funds in the category.
Liquidity: Government money market funds are highly liquid and may make sense for cash you might need. Prime and municipal money market funds may no longer be as liquid as US Treasury or government money market funds during periods of market stress, and may be more appropriate for cash you might not need immediately.
The details: Municipal money market funds offer federally tax-free income, and some offer income also free from state tax.
These days, certificates of deposit offer significantly higher yields than most savings accounts, but to get those yields, you may have to lock up your savings for a set period of time until it reaches maturity—for instance, a CD may reach maturity and return your principal in 3, 6, 12, 24, or some other number of months.
Yields: As of July 6, the highest yielding 6-month CDs paid more than 2%, 1-year CDs yielded 2.45% interest, and 3-year CDs were at 3%.4
Liquidity: Fidelity recommends holdings CDs until maturity. If you need access to your savings before maturity and you own a brokered CD, you would have to turn to the secondary market, which would incur transaction costs, and you may need to sell for a loss. Banks may charge a fee for early withdrawals.
Protection: CDs are eligible for FDIC protection. For some people, the FDIC protection offered by a single bank account is not enough to cover their full savings. A brokerage account can aggregate brokered CDs from different FDIC banks in one account, so you may be able to put more than $250,000 in CDs without running into the FDIC insurance limit.
The details: There are multiple ways to buy CDs. You could buy one directly from a bank, or you could buy one through a brokerage, known as a "brokered CD." If you buy a brokered CD as a new issue, there are no transaction costs or management fees at Fidelity.
One way to manage the trade-off of higher yields and lower liquidity from CDs may be with a ladder. A ladder arranges a number of CDs with staggered maturities, freeing up a portion of your investment at preset intervals as each CD matures. If you choose to reinvest, you will buy another longer-maturity CD, and eventually your ladder will yield the prevailing rates of the longest-date CDs. (Watch our video.) Learn about Fidelity's Model CD Ladders that simplify the purchase of a CD ladder.
Individual bonds offer a range of yields for different risk levels and maturities. These securities could be laddered, and the range of credit risk in the market means that you can select a yield–risk option that suits you.
Yields: The yields on bonds have moved higher in recent years.
|Median||3 mo.||6 mo.||9 mo.||1 yr.||2 yr.||3 yr.|
Source: Fidelity.com as of July 28, 2018. (Note: Shows median yields available per category).
Liquidity: You also may not be able to find a buyer if you decide to sell, forcing you to accept a lower price if you need to sell your bond. And if interest rates rise, the price of your bond will fall. So if rates have gone up since you bought your bond, you may experience a loss. These risks mean it is important to consider whether a bond is an appropriate alternative investment for your cash. You should also try to diversify among individual bonds, perhaps by holding a number of securities from different issuers. To achieve diversification, it might require that you invest a significant amount of money. You also have to account for transaction costs—the fees to buy or sell individual securities.
Protection: Unlike CDs or savings accounts, individual bonds don't offer FDIC insurance. There is, however, Securities Investor Protection Corporation (SIPC) insurance for brokerage accounts. SIPC protects against the loss of cash and securities — such as stocks and bonds—held by a customer at a financially troubled SIPC-member firm. SIPC protection is limited to $500,000 and has a cash limit of $250,000. SIPC does not protect against declines in the value of your securities, and is not the same as FDIC protection.
Short-duration bond funds and ETFs
Many actively managed bond funds and ETFs do offer professional credit research, portfolio construction, and broad diversification to help manage credit risk. Those services come with fund fees, but these products also offer competitive yields.
Yields: Yields vary based on the strategy of the fund, including the maturity and credit quality of the bonds that the fund holds.
For an example of short-duration bond funds, here are the top results for short-term bond, and ultra-short bond category funds from Fidelity's Mutual Fund Evaluator. (Note: The top results are as of July 6, 2018, sorted by 3-year return, and show top results for Fidelity funds and for all funds.) You should do your own research to find bond funds that fit your time horizon, financial circumstances, risk tolerance, and unique goals.
|Ultra-short and short-term bond funds|
|Fidelity Fund||30-day yield||All funds||0-day yield|
|Fidelity® Conservative Income Bond Fund||2.22%||PIMCO Low Duration Income Fund Class A||2.65%|
|Fidelity® Limited term Bond Fund||2.90%||Thompson Bond Fund (THOPX)||3.37%|
Liquidity: You can buy and sell bond funds each day. There is no maturity date for most bond funds, so your return will reflect the market prices of the bonds held by the fund at the time you decide to buy and sell. The value of your investment will change as the prices of the bonds in the fund's portfolio shift, and those market moves could add to your yield, or reduce it.
Details: Defined maturity funds offer professional management and diversification, with declining price volatility as the fund approaches its target maturity. (Learn more about defined maturity funds.)
The right option for your cash
If you have cash, it may well be worth considering some options beyond a savings account. Unlike risky stocks, longer-dated bonds, or other income producing investments, money markets, CDs, and short-duration bonds and bond funds all offer a mix of yield, risk, and access that could make them an alternative for some situations. The key is to look at your situation, feelings about risk, timeline, and goals, and find an option that works for you.
Next steps to consider
Discover money market funds from Fidelity.
Use our tool to build a CD ladder.
Help generate income while managing risk.
Credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate note, a municipal bond, or a mortgage-backed security, and the relative likelihood that the issue may default.
'AAA'—Extremely strong capacity to meet financial commitments; highest rating.
'AA'—Very strong capacity to meet financial commitments.
You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.
Control and Restricted securities must be sold in accordance with SEC Rule 144 requirements. Additional documentation, approval, and conditions must be met prior to selling, which may limit your ability to sell at a specified time.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
Lower yields - Because of the inherent safety and short-term nature of a CD investment, yields on CDs tend to be lower than other higher risk investments. Interest rate fluctuation - Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Since changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements.
Credit risk - Since CDs are debt instruments, there is credit risk associated with their purchase, although the insurance offered by the FDIC may help mitigate this risk. Customers are responsible for evaluating both the CDs and the creditworthiness of the underlying issuing institution.
Insolvency of the issuer- In the event the Issuer approaches insolvency or becomes insolvent, it may be placed in regulatory conservatorship, with the FDIC typically appointed as the conservator. As with any deposits of a depository institution placed in conservatorship, the CDs of the issuer for which a conservator has been appointed may be paid off prior to maturity or transferred to another depository institution. If the CDs are transferred to another institution, the new institution may offer you a choice of retaining the CD at a lower interest rate or receiving payment.
Selling before maturity - CDs sold prior to maturity are subject to a concession and may be subject to a substantial gain or loss due to interest rate changes and other factors. In addition, the market value of a CD in the secondary market may be influenced by a number of factors including, but not necessarily limited to, interest rates, provisions such as call or step features, and the credit rating of the Issuer. The secondary market for CDs may be limited. Fidelity currently makes a market in the CDs we make available, but may not do so in the future.
Coverage limits- FDIC insurance only covers the principal amount of the CD and any accrued interest. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. More generally, FDIC insurance limits apply to aggregate amounts on deposit, per account, at each covered institution. Investors should consider the extent to which other accounts, deposits or accrued interest may exceed applicable FDIC limits. For more information on the FDIC and its insurance coverage visit www.fdic.gov.
To protect existing shareholders and to ensure orderly liquidation of the Defined Maturity Funds (DMFs), the funds will close to purchases for new and existing shareholders 12 months prior to their maturity date. As the funds approach their liquidation date, the funds' securities will mature, and the funds may reinvest the proceeds in money market securities with lower yields than the securities previously held by the funds. Investment in money market securities is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. In addition, the amount of the fund's income distributions will vary over time and the breakdown of returns between fund distributions and liquidation proceeds will not be predictable at the time of your investment, resulting in a gain or loss for tax purposes.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917