Where Should You Park Your Cash? Comparing the Safest Options
Safe options to grow your short-term savings.
Cash equivalents are low-risk savings tools that help your money grow while keeping it accessible when you need it. Understanding the differences can help you choose what works best for your goals.
With interest rates still high, I’ve had a lot of conversations lately about where to keep short-term savings. Maybe it’s your emergency fund. Maybe it’s money you plan to use in the next year or two. Whatever the purpose, the goal is the same: keep it safe, earn something, and stay flexible.
There are a few common places to park cash that are considered extremely low risk. They’re not flashy, but they can make a real difference when used intentionally. We typically call these savings options “cash equivalents” given the low risk nature.
Here’s a breakdown of the options:
Certificates of Deposit (CDs)
CDs are offered by banks and credit unions. You agree to leave your money in the CD for a set period, such as 3 months, 6 months, 1 year, or even 5 years. In return, the bank pays you a fixed interest rate, typically higher for longer terms. These accounts are insured by the FDIC or NCUA, which makes them very safe.
The tradeoff is flexibility. If you need to access your money before the CD matures, you’ll likely face an early withdrawal penalty, often equal to several months of interest. CDs can be a great option if you’re confident you won’t need the funds until the term is up. But they’re not ideal for money you may need to access unexpectedly.
Money Market Mutual Funds
Money market funds are typically traded in a brokerage account, which is usually insured by SIPC. That coverage protects your account in the event your brokerage firm fails, though it doesn’t cover market losses.
These funds are not FDIC insured, but they’re considered very low risk. They invest in short-term, high-quality securities like U.S. Treasuries, agency debt, and commercial paper. You can usually move in and out of them quickly, though the trades typically take one business day to settle.
Many money market funds offer competitive yields compared to savings accounts. Some, especially those that invest only in U.S. government securities, may offer the added benefit of being exempt from state and local taxes. This can make a meaningful difference if you’re in a high-tax state.
Money Market Savings Accounts
These accounts are offered by banks and are FDIC insured, which makes them a safe place to hold cash. They’re very liquid and often come with features like check-writing or debit card access, though not all do.
Rates vary widely. Online banks like Ally, Marcus, and Capital One tend to offer much higher yields than traditional brick-and-mortar banks. It’s worth shopping around to find a competitive rate.
It’s also important to remember that yields on money market savings accounts move with interest rates. What you earn today isn’t locked in. If the Federal Reserve lowers rates, you can expect your yield to drop too.
Treasury Bills and Bonds
Treasuries are bonds issued by the U.S. government and are considered among the safest places to keep cash. You can buy them through a brokerage account.
Treasury bills are short-term bonds that mature in one year or less and work well for money you’ll need soon. Treasury notes and bonds have longer maturities, from two to thirty years. Typically, the longer the maturity, the higher the interest you earn.
One benefit of Treasuries is that the interest is exempt from state and local taxes, which can be especially helpful if you live in a high-tax state.
While Treasuries are very safe, the U.S. credit rating has been downgraded a few times recently because of the growing national debt and political challenges. The chance of default is still extremely low, but it is not zero, so the perception of risk has changed somewhat in the last decade.