Cash is an essential part of any financial plan. It provides liquidity, stability, and security for your money. However, not all cash is created equal. Depending on where you park your cash, you can earn different returns, face different risks, and enjoy different benefits.
In this article, we will explore some of the best options for parking your cash, from low-risk to moderate-risk vehicles. We will also discuss how to build a smart cash parking strategy that aligns with your financial goals and how to use Kubera, a single dashboard for tracking your assets, to simplify and optimize your cash management.
Three Low-Risk Cash Parking Options
If you are looking for a safe and reliable place to park your cash, you may want to consider some of the following low-risk options. These vehicles offer minimal or no risk of losing your principal, while providing some interest income and easy access to your money.
1. High-yield savings accounts
A high-yield savings account is a type of bank account that pays higher interest rates than traditional savings accounts. High-yield savings accounts are typically offered by online banks or credit unions, which have lower overhead costs than brick-and-mortar banks and can pass on the savings to customers. 1
Unlike checking accounts, high-yield savings accounts have limits on how many withdrawals or transfers you can make per month, usually six. This helps you save more and avoid unnecessary spending. However, you can still access your money anytime you need it through online banking, ATM withdrawals, or wire transfers.
High-yield savings accounts are ideal for parking your emergency fund, which is a stash of cash that can cover three to six months of living expenses in case of an unexpected event such as job loss, medical emergency, or car repair. Having an emergency fund can help you avoid going into debt or tapping into your long-term investments when faced with a financial crisis.
High-yield savings accounts are also FDIC-insured up to $250,000 per depositor, per institution. This means that even if the bank fails, you will not lose your money. FDIC stands for Federal Deposit Insurance Corporation, which is an independent agency of the U.S. government that protects depositors in case of bank failures. 2
2. Certificates of deposit (CDs)
A certificate of deposit (CD) is a type of bank account that pays a fixed interest rate for a fixed period of time. CDs typically offer higher interest rates than savings accounts, but they also require you to lock up your money for a certain term, such as six months, one year, or five years. If you withdraw your money before the term ends, you will have to pay an early withdrawal penalty, which can reduce or eliminate your interest earnings.
CDs are best suited for parking cash that you do not need in the near future and that you want to earn a guaranteed return on. For example, you may want to use a CD to save for a specific goal such as a down payment for a house or a car purchase. You can choose a CD term that matches your time horizon and enjoy a higher interest rate than a savings account.
CDs are also FDIC-insured up to $250,000 per depositor, per institution. This means that your money is safe even if the bank goes bankrupt. 3
3. Money market accounts
A money market account (MMA) is another type of bank account that pays higher interest rates than savings accounts but lower than CDs. MMAs also have limits on how many withdrawals or transfers you can make per month, usually six. However, unlike savings accounts or CDs, MMAs may offer check-writing and debit card access to your money.
MMAs are suitable for parking cash that you want to earn some interest on but also have some flexibility and convenience in accessing it. For example, you may want to use an MMA as a secondary emergency fund or as a buffer for your checking account.
MMAs may have minimum deposit and minimum balance requirements to open and maintain the account. They may also charge monthly fees if you do not meet these requirements. Therefore, it is important to compare different MMAs and choose one that fits your needs and budget.
MMAs are also FDIC-insured up to $250,000 per depositor, per institution. This means that your money is protected even if the bank fails. 4
Three Moderate-Risk Cash Parking Options
If you are willing to take on a bit more risk for a higher return, you may want to consider some of the following moderate-risk options for parking your cash. These vehicles offer some potential for capital appreciation, but they also expose you to some market fluctuations and volatility.
1. Treasury securities
Treasury securities are debt instruments issued by the U.S. government to fund its operations and pay off its debts. They are considered one of the safest investments in the world, as they are backed by the full faith and credit of the U.S. government.
There are different types of treasury securities, such as treasury bills (T-bills), treasury notes (T-notes), and treasury bonds (T-bonds). They differ in their maturity dates, interest rates, and prices. T-bills have maturities of less than one year, T-notes have maturities of two to 10 years, and T-bonds have maturities of more than 10 years.
Treasury securities are ideal for parking cash that you want to preserve and grow over time, while also enjoying some tax benefits. The interest income from treasury securities is exempt from state and local income taxes, although it is still subject to federal income taxes. Additionally, if you hold treasury securities until maturity, you will receive your principal back in full.
You can purchase treasury securities directly from the U.S. Treasury through its website or through a brokerage account. You can also buy and sell treasury securities in the secondary market before they mature, but you may incur some price fluctuations depending on the interest rate environment. 5
2. I Bonds
I Bonds are a special type of treasury security that offers inflation protection. They pay a fixed interest rate plus an additional rate that is adjusted every six months based on the changes in the Consumer Price Index (CPI), which measures inflation.
I Bonds are suitable for parking cash that you want to protect from losing its purchasing power over time due to inflation. For example, you may want to use I Bonds to save for long-term goals such as retirement or college education.
You can buy I Bonds directly from the U.S. Treasury through its website or through a brokerage account. You can also redeem them anytime after one year, but you will lose three months’ worth of interest if you redeem them before five years. 6
3. Short-term bond funds
Short-term bond funds are mutual funds or exchange-traded funds (ETFs) that invest in bonds with maturities of less than five years. They typically offer higher returns than savings accounts or CDs, but lower returns than long-term bond funds. They also have lower risks than long-term bond funds, as they are less sensitive to changes in interest rates.
Short-term bond funds are appropriate for parking cash that you want to earn some income and diversification benefits, while also having some liquidity and flexibility. For example, you may want to use short-term bond funds as part of your asset allocation strategy or as a way to access different segments of the bond market.
You can buy and sell short-term bond funds through a brokerage account or directly from the fund company. You will have to pay some fees and expenses associated with investing in these funds, such as management fees, sales charges, and expense ratios. You will also have to pay taxes on the interest income and capital gains generated by these funds.
Comparing Cash Parking Options
When evaluating different cash parking options, it's crucial to consider several factors, such as interest rates, fees, accessibility, and risk. In this section, we'll delve into each of these aspects to help you make an informed decision.
Interest rates and annual percentage yield (APY)
Interest rates and APY are critical factors when comparing cash parking options. Higher interest rates and APY typically translate to better returns on your parked cash. However, remember that higher returns often come with increased risk or reduced accessibility. When comparing options, make sure to examine the APY, as it takes into account the compounding effect of interest and gives you a more accurate representation of your potential earnings.
Account fees and minimum deposit requirements
Fees and minimum deposit requirements can significantly impact your returns. Some accounts may charge monthly maintenance fees or require a minimum deposit to open the account or earn interest. Be mindful of these costs, as they can erode your earnings over time. Online banks and credit unions often offer lower fees and minimum deposit requirements compared to traditional banks.
Access to funds and withdrawal limitations
Accessibility to your funds is another vital consideration when parking cash. High-yield savings accounts and money market accounts usually offer more flexible access to your funds than CDs and treasury securities. However, federal regulations typically limit the number of withdrawals and transfers you can make from these accounts each month. Make sure to evaluate your liquidity needs when choosing a cash parking option.
Stability, risk, and investment duration considerations
The stability and risk associated with different cash parking options vary. High-yield savings accounts, CDs, and money market accounts are generally considered low-risk, as they are insured by the FDIC up to $250,000. Treasury securities are backed by the full faith and credit of the U.S. government, making them among the safest investments. On the other hand, short-term bond funds can be more volatile, as they are subject to market fluctuations.
The investment duration you are willing to commit to should also be considered. CDs and treasury securities have fixed terms and may impose penalties for early withdrawals, while high-yield savings and money market accounts allow more flexibility. Align your cash parking choice with your investment horizon and risk tolerance.
Tips for Building a Cash Parking Strategy
Now that you know some of the best options for parking your cash, how do you decide which one to use? Here are some tips for building a smart cash parking strategy that suits your needs and goals.
1. Diversify across multiple cash parking options
One of the key principles of investing is diversification, which means spreading your money across different types of assets or vehicles that have different risk-return profiles. This way, you can reduce your overall risk and increase your chances of achieving your desired return.
The same principle applies to cash parking. You do not want to put all your eggs in one basket and rely on one single vehicle for all your cash needs. Instead, you want to diversify across multiple cash parking options that offer different levels of safety, return, liquidity, and convenience.
For example, you may want to allocate some of your cash to a high-yield savings account for your emergency fund, some to a CD for a specific goal, some to a treasury security for inflation protection, and some to a short-term bond fund for income and diversification.
By diversifying across multiple cash parking options, you can optimize your cash management and achieve a balance between risk, return, liquidity, and convenience.
2. Align your cash parking with your financial goals
Another important factor to consider when choosing where to park your cash is your financial goals. Your financial goals are the specific outcomes that you want to achieve with your money, such as saving for retirement, buying a house, or traveling the world.
Your financial goals can help you determine how much cash you need to park, how long you need to park it, and what kind of return you need to earn on it.
For example, if you are saving for a short-term goal such as a vacation, you may want to park your cash in a high-yield savings account or a CD that matches your time horizon and offers a decent return. If you are saving for a long-term goal such as retirement, you may want to park your cash in a treasury security or a short-term bond fund that offers inflation protection and income.
By aligning your cash parking with your financial goals, you can ensure that your cash is working for you and helping you achieve your desired outcomes.
3. Assess the impact of the Federal Reserve and interest rates
Another key factor to consider when parking your cash is the impact of the Federal Reserve and interest rates. The Federal Reserve is the central bank of the United States that sets monetary policy and influences the level of interest rates in the economy. Interest rates are the cost of borrowing or lending money and affect the returns and prices of various cash parking vehicles.
The Federal Reserve can raise or lower interest rates depending on the economic conditions and its policy objectives. When the economy is strong and inflation is high, the Federal Reserve may raise interest rates to cool down the economy and keep inflation under control. When the economy is weak and inflation is low, the Federal Reserve may lower interest rates to stimulate the economy and encourage spending and borrowing.
The changes in interest rates can affect your cash parking decisions in several ways. For example, when interest rates are high, you may want to lock in a higher rate by investing in a CD or a treasury security with a longer term. When interest rates are low, you may want to keep your cash in a high-yield savings account or a money market account that can adjust to changing rates. 7
By assessing the impact of the Federal Reserve and interest rates on your cash parking options, you can make informed decisions that maximize your returns and minimize your risks.
4. Importance of regular financial planning and review
Finally, one of the most important aspects of building a smart cash parking strategy is regular financial planning and review. Financial planning is the process of creating a plan that outlines your current financial situation, your financial goals, and the strategies and actions that will help you achieve them. Financial review is the process of monitoring and evaluating your progress toward your financial goals and making adjustments as needed.
Regular financial planning and review can help you stay on track with your cash parking strategy and ensure that it aligns with your changing needs and goals. For example, you may want to review your cash parking strategy at least once a year or whenever there is a significant change in your life such as getting married, having a child, changing jobs, or retiring.
By conducting regular financial planning and review, you can optimize your cash management and achieve financial success.
How Kubera Can Help Manage and Track Your Cash Parking?
As you can see, finding the right place to park your cash can be challenging and time-consuming. You have to compare different options, weigh their pros and cons, align them with your goals, monitor their performance, and adjust them as needed.
Fortunately, there is a tool that can help you simplify and optimize your cash parking decisions: Kubera.
Kubera is a single dashboard for tracking all your assets across different platforms and categories. Whether you have cash in bank accounts, CDs, treasury securities, bond funds, or any other asset class, you can easily track them all in one place with Kubera.
Here are some of the benefits of using Kubera for managing and tracking your cash parking:
- Consolidating asset tracking in a single dashboard: Kubera allows you to link your accounts from various platforms and providers and view all your assets in one dashboard. You can see your total net worth, your asset allocation, your cash balance, and your cash flow at a glance. You can also customize your dashboard to suit your preferences and needs.
- Analyzing the performance of different accounts and vehicles: Kubera enables you to compare and contrast the performance of different cash parking options and see how they affect your overall portfolio. You can see the interest rates, returns, fees, risks, and benefits of each option and make informed decisions based on data.
- Aligning cash parking decisions with overall financial goals: Kubera helps you align your cash parking decisions with your overall financial goals and plan. You can set up goals for each asset category and track your progress toward them. You can also see how your cash parking strategy fits into your broader asset allocation strategy and adjust it as needed.
- Simplifying the decision-making process: Kubera simplifies the decision-making process by providing you with insights, recommendations, and alerts based on your situation and goals. You can get tips on how to optimize your cash parking strategy, how to take advantage of market opportunities, and how to avoid common pitfalls.
Cash is an important part of any financial plan, but not all cash is created equal. Depending on where you park your cash, you can earn different returns, face different risks, and enjoy different benefits.
In this article, we have explored some of the best options for parking your cash, from low-risk to moderate-risk vehicles. We have also discussed how to build a smart cash parking strategy that aligns with your financial goals and how to use Kubera, a single dashboard for tracking your assets, to simplify and optimize your cash management.
Finding the right place to park your cash can be challenging and time-consuming, but it does not have to be. With Kubera, you can easily track all your assets across different platforms and categories, analyze the performance of different accounts and vehicles, align your cash parking decisions with your overall financial goals, and simplify the decision-making process.
If you want to take control of your cash management and achieve financial success, sign up for Kubera today and start tracking your assets in one dashboard.