How to earn more on your cash

There are a variety of alternatives to traditional savings accounts.

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Key takeaways

  • Investors have a variety of options when it comes to managing their cash. Choosing the right one for you requires considering your goals, attitude, and needs.
  • Among these options, money market funds can offer easy access to your cash, but they typically pay less than certificates of deposit (CDs) or bonds.
  • Short-term CDs and short-duration bonds may pay more than many savings accounts, but they come with risks that savings accounts don't.
 

If you are like most people you probably have some cash in a checking account for day-to-day spending, some savings for major purchases or unexpected expenses, and maybe some more cash that's sitting idle while you search for the right place to invest it.

However you plan to use your cash, one thing you’ll likely consider is whether it's earning as much as it potentially could be. There are a variety of ways to invest your cash and choosing a higher-yielding home for at least some of it could make a potentially meaningful difference to your wealth. If you had $50,000 in cash, for example, the difference between having kept it in the average FDIC-insured savings account and a higher-yielding option would have been thousands of dollars (see the hypothetical examples in the table below).

What $50,000 would have potentially earned over 3 years

  Savings account Government money market 3-year CDs 3-year Treasurys
Yield/interest 0.1% 1.87% 2.15% 1.85%
3-year return $150 $2,883 $3,295 $2,827
All returns are hypothetical, for illustrative purposes only and do not represent actual or implied performance of any investment option. Example assumes $50,000 initial investment or deposit, holding period of 3 years, no fees, commissions, or taxes. Savings account interest rate is based on average savings account interest rates from Bankrate as of date indicated. Returns assume biannual compounding and reinvestment at a constant interest rate. Government money market yield is based on the industry average 7-day yield for government money market funds, according to iMoney.net as of the date indicated. The CD and Treasury yields assume 3-year maturity and reinvestment of interest payments with no change in rates and are based on averaged data from Fidelity.com as of the date indicated. All yields/interest rates as of July 31, 2019. Yields/interest rates are historical and will vary based on market conditions.
 

Before you move your cash to find the highest-yielding investment, you should know that higher-yielding investments may have significant differences from bank savings accounts. Unlike bank savings accounts, higher yielding options may not be insured by the Federal Deposit Insurance Corporation (FDIC).

Consider your goals

Before you look for higher-yielding options, take a second to consider the role that cash plays in your overall financial plan. You should consider how much you need your money to earn and how much value you place on being able to get your money when you want it, a characteristic known in investment terms as liquidity.

Here are the pros and cons of different places to keep cash.

Money market mutual funds

Money market funds are mutual funds that invest in short-term debt securities with low credit risk. There are 3 categories of money market funds—government, prime, and municipal.

Government funds hold Treasury and other securities issued by the US government. Prime funds do too, but they may also invest in securities issued by private companies. Municipal funds invest in debt issued by states, cities, and public agencies.

When interest rates rise, those higher rates typically pass through to money market funds quickly. For example, when rates rose in 2017 and 2018, money market fund yields more than doubled, far outpacing the increase in savings account yields.1 Money market funds also offer low risk and easy access to your money.

Yield:  As of August 11, 7-day yields on the Fidelity® Government Money Market Fund (SPAXX) were 1.83%. Yields on the Fidelity® Money Market Fund (SPRXX) offered on Fidelity.com were 1.95%, and yields on the Fidelity® Municipal Money Market Fund (FTEXX) were 1.07%. Generally, funds that require investors to maintain certain minimum balances pay higher interest.

Liquidity: Government funds offer easy access to your cash and may make sense for money you might need on short notice. Prime and municipal money market funds may be harder to take money out of when financial markets are under stress. They may be more appropriate for cash you may not need to get hold of quickly.

Protection: Money market funds 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.

High-yield savings accounts

While traditional savings accounts offer very little interest these days, some banks offer higher-yielding savings options. A high-yield savings account can allow you to access your cash, but it may not work the way that a savings account from your neighborhood bank does. It makes sense to shop around. Some high-yield accounts are offered online only, and some may not offer ATM access. You need to be aware of fees, which could eat into the amount of interest that your money earns. These accounts may also require that you keep a certain amount of money in them in order to get the highest interest rates. Also, the FDIC insurance limits may require you to spread your money across accounts at several banks in order to make sure all your money is insured.

For more information related to the FDIC, including coverage limits and rules, please visit Safeguarding Your Accounts.

Yield: In some cases, the yields are as high as 2.5%.

Liquidity: These accounts are liquid. That means you can access your savings without having to wait for someone to "buy" your investment as you would if your money was tied up in a stock or bond. There is no set time period that you have to keep your money in the account for.

Protection: These accounts offer full FDIC insurance. That means the government insures you against losing your money if the bank were to fail. The insurance covers losses of up to $250,000 per person, per bank, per account ownership category. 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


CDs

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. For instance, CDs may return your principal only after 3, 6, 12, 24, or some other number of months. 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.

Yields: As of August 1, the highest-yielding 6-month and 1-year CDs paid 2%, and 3-year CDs were at 2.15%.3

Liquidity: Fidelity recommends holdings CDs until maturity. If you own a CD in a brokerage account and need access to your savings before maturity, you could have to sell it for a loss and also pay fees. Banks may charge fees for early withdrawals.

Protection: CDs are eligible for FDIC insurance. 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.

Short-duration bonds

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. There are 4 categories of short-duration bonds—US Treasury, corporate, tax-free municipal, and taxable municipal. Treasury bonds are backed by the full faith and credit of the US government. Corporate bonds are securities issued by private companies, and municipal bonds are issued by states, cities, and public agencies.

Yields: The yields on bonds have moved higher in recent years.

  3-month 6-month 9-month 1-year 2-year 3-year
US Treasury 2.05% 2.07% 2.05% 1.99% 1.83% 1.78%
Corporate
(Aaa/AAA)
2.07% 1.95% 2.03% 1.58% 1.61% 1.63%
Municipal
(Aaa/AAA)
1.04% 1.04% 1.03% 1.07% 1.08% 1.08%
Taxable Municipal 1.90% 2.10% 2.11% 2.13% 2.09% 2.11%
Source:  Fidelity.com as of August 1, 2019. (Note: Shows median yields available per category.)
 

Liquidity: You 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, you might be required to 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.

Short-duration bond funds and ETFs

Bond funds and ETFs offer additional options for your cash. Some track the performance of an index while others are actively managed using professional credit research and portfolio construction to help manage risk. Those services come with fees, but these products also offer yields that are competitive with alternatives.

Yields: Yields vary based on the strategy of the fund, including the maturity and credit quality of the bonds that the fund holds.

Fidelity's Mutual Fund Evaluator and ETF screener can provide examples of short-duration bond funds and ETFs. Below 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 August 1, 2019, sorted by 3-year return, and show top results for Fidelity funds and for all funds.) The ETF results show short-duration Fidelity Fixed Income ETFs that can be bought commission-free online. (Results are sorted by Net Assets and exclude ETNs, Schedule K-1 Issuers, and leveraged or inverse products. The "all funds" results are sorted by asset size and reflect the same criteria, but for any sponsor.) You should do your own research to find bond funds and ETFs that fit your time horizon, financial circumstances, risk tolerance, and unique goals.

Ultra-short and short-term bond funds
Fidelity Funds 30-day yield, as of July 31, 2019 Fidelity Short Maturity ETFs  
Fidelity® Limited Term Bond Fund (FJRLX) 2.21% Fidelity® Limited Term Bond ETF (FLTB) 2.07%
Fidelity® Conservative Income Fund (FCONX) 2.29% Fidelity® Low Duration Bond Factor ETF (FLDR) 2.56%
All funds
PIMCO Low Duration Income Fund Class A (PFIAX) 2.78% iShares 1-3 Year Treasury Bond ETF (SHY) 1.72%
Thompson Bond Fund (THOPX) 3.34% iShares Short Treasury Bond ETF (SHV) 2.12%
 

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.

Protection: Mutual funds and ETFs don't offer FDIC insurance. There is, however, Securities Investor Protection Corporation (SIPC) insurance for brokerage accounts.

The right option for your cash

If you have cash, you have options to consider. The key is to look at your situation, your feelings about risk, timeline, and goals, and find an option that works for you.

Next steps to consider

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