If you have funds sitting in a traditional savings account, odds are you are leaving money on the table when it comes to earning a reasonable return with low risk. Preserving the value of your cash while also earning a reasonable return is key to growing your wealth over time. Many Luminvest clients have cash savings in the Vanguard Federal Money Market Fund (VMFXX: 4.28% 7-day SEC yield as of 1/24/2025) or the Altruist Cash Account (4.00% APY as of 1/24/2025 with FDIC insurance up to $1 million per account owner). Below, we outline some of the most effective options for securing and growing your cash, beyond simply stashing it under your mattress or in a traditional savings account.
1. Cash Management Accounts
A cash management account (CMA) is a versatile tool that combines the features of checking and savings accounts with investment capabilities. Offered by non-bank financial institutions (such as brokerage firms), CMAs can be an excellent alternative to traditional bank accounts. Examples include the Vanguard Cash Plus Account and Altruist Cash Account. CMAs often allow you to sweep cash into partner banks to earn a higher interest rate, while providing FDIC insurance coverage up to $1 million or more, depending on the institution. Some also offer flexible features such as no minimum account requirements and same-day transfers, making them a practical choice for individuals who value both liquidity and yield.
2. High-Yield Savings Accounts
High-yield savings accounts (HYSA) have become increasingly popular, especially as interest rates have risen and technological advances make online banking more accessible. Depending on the bank and current interest rates, you may earn 4% or more annually (as of early 2025), which is far better than most traditional savings accounts offer. HYSAs are FDIC-insured up to $250,000 per depositor per insured bank, ensuring your funds are protected. Consider shopping around to find the best rates, as they can vary significantly.
3. Money Market Accounts
Money market accounts (MMAs) are another great option for those looking to earn a bit more on their cash. These accounts typically offer a higher interest rate than traditional savings accounts, but with the same FDIC protection (subject to the same limits as other bank accounts). Some accounts may require a higher minimum balance or have limits on the number of withdrawals per month.
4. Money Market Funds
Money market funds (MMFs) are one of the best options for cash savings if you're looking for potentially higher yields with relatively low risk for minimal effort. Money market funds are mutual funds that invest in low-risk assets like Treasury bonds, CDs, or short-term, high-quality corporate bonds with maturities of less than a year. While they aren't insured by the FDIC, they are generally considered safe due to the quality of the investments they hold. MMFs are highly liquid, meaning you can typically access your funds quickly.
The Vanguard Federal Money Market Fund (VMFXX), mentioned earlier, is one such example of a money market fund. Some investors may prefer alternatives such as the Vanguard Treasury Money Market Fund (VUSXX) due to a higher percentage of state tax-exempt income. The Vanguard Municipal Money Market Fund (VMSXX) is another option for those seeking income exempt from federal personal income taxes. Similar money market funds can be found by other companies such as Schwab, Fidelity, and JP Morgan.
Government money market funds invest solely in government-backed assets (like Treasury bonds), making them the safest and most liquid. Retail (or prime) money market funds can invest in a wider range of short-term debt, including corporate and municipal bonds. A key difference is that retail funds are required to implement liquidity fees and redemption gates during market stress, which could temporarily restrict access to your money. Government funds may implement these measures, but are not required to (and some, like Vanguard's, choose not to).
5. Certificates of Deposit (CDs)
If you don’t need immediate access to your cash and are comfortable locking it up for a fixed period, certificates of deposit (CDs) can provide a predictable return with a fixed interest rate for a term. The trade-off here is that your money is tied up until the CD matures, which could range from a few months to several years. If you need to access your funds before the maturity date, you may face penalties. CDs are FDIC-insured, so your funds are protected up to the insurance limits.
6. Treasury Bills
For those looking for ultra-safe investments, U.S. Treasury securities are hard to beat. Treasury bills (T-bills) are short-term securities that you can buy directly from the government. These are backed by the full faith and credit of the U.S. government, making them virtually risk-free. While yields may not be exceptionally high, T-bills offer competitive interest rates and are exempt from state and local taxes, which could be particularly advantageous for high-net-worth individuals in higher-tax states. You can buy them directly from the U.S. Treasury at www.treasurydirect.gov to avoid brokerage fees.
In Conclusion
When it comes to maximizing yield and minimizing risk, it’s crucial to understand your own financial goals, time horizon, and risk tolerance. For those seeking safety, cash management accounts (CMAs), high-yield savings accounts (HYSAs), money market accounts (MMAs), Money Market Funds (MMFs), Certificates of Deposit (CDs), and Treasury bills are all excellent cash savings vehicles that generally provide a higher return compared to traditional savings accounts with low risk. Please reach out to your advisor with any questions or for assistance in tailoring a strategy for your unique situation.
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