Who doesn’t love having a pile of cash sitting around? It acts as both a security blanket (think: a rainy-day fund) and a store of untapped potential just waiting to be unleashed.
And yet, if you keep your cash around as just cash, you might be making a mistake. Instead, until you require that pile of greenbacks, you should consider investing it in cash alternatives.
Cash alternatives—often also called cash equivalents—are short-term investments that help you earn a little extra from your cash, but that can also be quickly converted into cash should the need arise.
So, which kind of cash alternative should you park your idle money in? Today, I’ll go over several cash alternatives that will keep your money both productive and accessible. Many of these alternatives insure your money in some way, some boast tax advantages, and all of them have perks worth reviewing.
Depending on your investment objectives, you might need one or several cash alternatives. Read on as I run through the options, and you’ll be prepared to pick the best cash alternative(s) for you.
What Are Cash Alternatives?
A cash alternative is a financial instrument you can utilize rather than storing money in your wallet. Many cash alternatives are low-risk financial vehicles. They’re also liquid, which means you can quickly and easily convert them into cash without losing much (if any) value.
Why Consider Cash Alternatives?
Typically, you’ll invest in a cash alternative to earn more from the cash than you’d make by keeping it in a non-interest-bearing account. At the very least, it’s a way to grow your money, even if not substantially.
Because your money grows in them, you can use cash alternatives to keep pace with inflation until you’re ready to deploy your cash. Remember: Inflation literally eats away at the value of a dollar over time. So technically, if your money isn’t growing, inflation is making sure that it’s shrinking.
Cash alternatives are typically low-risk investments, but depending on your risk tolerance and time horizon, you may choose ones that are relatively riskier but have higher return potential.
Best Cash Alternatives
1. Checking Account
A checking account is an excellent place to store money for everyday expenses. Checking accounts come with a debit card, which is a convenient way to pay for items or withdraw cash when you really need it.
You can write checks from a checking account (obviously), have paychecks directly deposited into it, and pay credit cards and other bills from it. It’s a flexible bank account, and within it, your money is as liquid as it could be.
However, while a checking account keeps money safe and accessible, with few exceptions—there are interest-bearing checking accounts—it really doesn’t help your money grow. In that case, your cash is just cash. And while you could consider interest-bearing checking accounts to be cash equivalents, they rarely offer anything above a nominal yield.
In other words, there are many more productive cash alternatives you should consider.
Related: 8 Best Personal Capital Alternatives
2. High-Yield Savings Accounts
High-yield savings accounts (HYSAs) are an excellent short-term investment. These accounts offer much higher rates than traditional savings accounts but usually have similarly high liquidity as cash deposits.
One downside of an HYSA is that interest rates can change. Know that even if you get the best interest-rate deal possible initially, that rate might drop over time. For example, many different banks lowered their high-yield savings account interest rates numerous times throughout 2020. This happens because interest rates are tied to the Federal Reserve’s fed funds rate, which goes up and down over time depending on the Fed’s views of the economy. So it’s essential to keep an eye on a bank’s rates not only when you open the account, but over time as long as you have an account with the bank.
Also keep an eye on fees. Some banks will charge a monthly maintenance fee for high-yield savings accounts, or charge other fees for using certain bank account features. So understand all of the fees associated with your chosen account before signing up.
Ultimately, high-yield savings accounts are a great cash alternative that can earn you a higher rate of return than a traditional savings account without sacrificing liquidity. They’re also extremely low-risk—the money in your account can’t decline in value, and each depositor is typically given up to $250,000 in Federal Deposit Insurance Corporation (FDIC) insurance or National Credit Union Administration (NCUA) insurance.
Save with Step Banking
Step, made popular by its unique “hybrid” Step Visa Card, has expanded its offerings to include a powerful high-yield savings tool.
Users earn 5% annually—compounded and paid monthly—on up to $250,000 saved in their Savings Goals, calculated using the average daily balance in your Savings Goals. Like with your average savings account, Step’s savings yield can change depending on movements in the Federal Funds Rate, but if that happens, Step will give you 30 days’ notice before it happens.
To qualify, the user must have a direct deposit of at least $500 per month, and the benefit extends for as long as the direct deposits continue. (Other perks of making qualifying direct deposits? Bonus points on dining, food delivery, charitable donations, specific merchants—and you can get paid up to two days early.)
And remember: When you sign up with Step, you also get their Step Visa Card—a spending card that functions like a debit card, but also boasts some of the features of a Visa credit card—including the ability to build your (or your child’s) credit history. You can’t spend money you don’t have, eliminating the fear of overdrafting. The card can be used to withdraw money fee-free at more than 30,000 ATMs, and it’s protected by Visa’s Fraud Protection and Zero Liability guarantee. Sign up for high-yield savings with Step today.
Read more in our Step Banking review.
3. Certificates of Deposit (CDs)
Certificates of deposit (CDs) are offered by most banks and credit unions and are easy to open and understand. CDs are almost risk-free and insured in the United States for up to $250,000. They are another savings instrument like savings accounts but come with longer-term commitments, varying from three months to five years.
CDs work by lending money to a bank for a set amount of time (the “term length”), with longer term lengths typically involving higher interest rates. Much like any interest-bearing asset, the longer the term length or commitment, the higher interest rate and return you can expect to earn in exchange for losing access to your money for longer.
During the term length, you gain interest on the principal at a rate usually higher than that of a high-yield savings account. If you take money out during the term length, you’ll generally have to pay a penalty, so it isn’t wise to invest money you anticipate needing in the near future.
CDs are a great example of the give-and-take involved with choosing a cash equivalent. CDs are decidedly less liquid than a savings account—your money will be wrapped up for a set amount of time, though in emergencies, you can still access it by paying an early withdrawal penalty—but they offer higher rates than basic and even high-yield savings accounts.
4. Money Market Accounts
Money market accounts are a category of savings accounts that offer higher interest rates than traditional savings accounts, but lower rates than high-yield savings accounts. Like with savings accounts, the interest rates are variable, not fixed. They’re also considered low-risk investments, they also enjoy FDIC or NCUA insurance, and they’re considered a popular place to keep an emergency fund.
The main pro of the money market account is that it offers a higher interest rate than your average savings account. Past that, however, they have a few drawbacks.
For one, while they are liquid, they tend to be less liquid than savings accounts. Users can conduct a limited number of transactions per month, which usually includes check-writing privileges and/or a debit card. The Federal Reserve used to cap withdrawals at six per month. That requirement—once mandated by Regulation D—is now gone, and many banks allow more transactions, but some banks and credit unions have kept the six-withdrawal limit.
Some money market accounts also charge monthly maintenance fees, and some also have minimum balance requirements. Lastly, while money market accounts typically earn higher interest rates than savings accounts, many other cash alternatives earn better rates.
5. Money Market Funds
Not to be confused with money market accounts, money market funds (or money market mutual funds) are open-ended mutual funds that invest in debt securities with short maturities. This is considered a low-risk investment with very low volatility.
Investors receive steady interest income from money market mutual funds. Depending on the types of securities in the fund, the income generated is either taxable or tax-exempt.
There are several different types of money market funds, including:
- Treasury (only holds Treasury securities)
- Government (holds Treasury and other agency securities)
- Prime (holds many types of debt security)
- Municipal (holds municipal debt securities)
Money market funds are more liquid than CDs and offer comparable (and sometimes higher) yields. However, money market funds—and any cash alternative you’d own inside of an investment account—is going to be less liquid compared to, say, a checking or savings account. That’s just because of the additional steps and waiting time involved. You have to sell the asset, wait for the transaction to settle, either wait for a check from the broker or have the money transferred to a related bank account, then withdraw the money. (And depending on the type of investment account, you might also have to worry about tax implications, withdrawal penalties, and other limitations.)
Because money-market funds invest in extremely short-term, extremely high-quality debt, they’re considered one of the safest investments on the planet. However, a few have failed on rare occasions (for instance, during the Great Recession). So any money up to the FDIC/NCUA limit is technically safer in a CD or other bank product. But money market funds remain an extremely safe place to earn some extra money on your money.
Many brokerage accounts will actually sweep idle cash into their money market funds so you’re still earning interest even if you don’t have all of your funds invested. Plynk, for instance, is an easy-to-use brokerage app that lets you invest in stocks, ETFs, mutual funds, and cryptocurrency, starting for as little as $1. Plynk auto-invests idle cash into the Fidelity Government Money Market Fund (SPAXX), which holds U.S. Treasury and other government debt—investments that are considered very safe compared to other debt securities.
6. Treasury Bills
Much like any other individual or business, the U.S. government can borrow money to make ends meet. It does so through the U.S. Treasury, which issues three primary kinds of debt:
- Treasury bonds (T-bonds): Mature in 20 to 30 years
- Treasury notes (T-notes): Mature in two to 10 years
- Treasury bills (T-bills): Mature in 4 to 52 weeks
Treasury bills—which can have maturities of four, eight, 13, 17, 26, and 52 weeks—are sold in increments of $100 (also the minimum purchase amount) up to a value of $10 million. You can typically purchase these through the U.S. government’s Treasury Direct or through a bank or broker.
When you buy a T-bill, you lend money to the U.S. government for a specified period of time. The price for a T-bill will vary, but usually will be below the bond’s face value, or “par value.” (For instance, a $1,000 T-bill might cost $975 to purchase.) When the T-bill matures, you receive the full par value of the bond—so the return on your investment is the difference between the discounted price you paid at auction and the par value of the T-bill.
Treasuries are one of the most secure investments in the world due to their virtually guaranteed repayment. The federal government hasn’t defaulted on a debt payment since moving away from the gold standard in 1971.
When you receive the repayment of your T-bills’ face value, the income generated is exempt from state and local taxes. This can make them a good choice for investors looking for reliable, tax-advantaged income.
T-bills are very liquid securities that generate a modest amount of income. Many people hold them in exchange-traded funds (ETFs) and mutual funds, though some financial institutions and fintech firms allow you to own them individually, or invest in them through Treasury products.
Invest in T-bills with Public.com
This investing product allows you to enjoy a higher yield than even the most competitive rates on a high-yield savings account—with equal accessibility to your cash. That is, you can tap your balance anytime; you don’t have to wait for your T-bill holdings to mature.
To participate, you’ll need to open an account with Public.com and make a deposit of as little as $100. The Treasury product is offered through Public by Jiko Securities, Inc., a registered broker-dealer, member FINRA and SIPC. In exchange for the management, trading, and custody of Treasury services, Jiko charges a flat management fee of 5 basis points (0.05%) per month, or 60 basis points per year, based on the average daily balance of your Treasury account. Public deducts this amount from your Treasury account each month and receives a portion of that management fee as a referral fee.
However, even factoring in this fee, Public.com’s Treasury Account provides easy access to a safe investment that generally yields more than a high-yield savings account and is exempt from state and local income taxes.
7. Treasury Notes
As mentioned above, Treasury notes are considered between short- and medium-term in nature, taking more time to mature (two to 10 years) than T-bills. Like with T-bills, T-notes are backed by the full faith and credit of the U.S. government, making them very low-risk investments. They’re sold at terms of two, three, five, seven, and 10 years.
Treasury notes pay a fixed interest rate every six months until the note matures. Federal taxes on interest earned are due each year, though the income is exempt from state and local taxes.
With T-notes and other bonds, you can either hold on until it matures, at which point your full principal will be repaid. But you can also sell the bond—which you’ll hopefully do for a gain, but you might have to sell at a loss. Either way, if you want to know how bonds move higher and lower, take a breath and brace yourself—it’s a mouthful:
Bonds’ performance is directly tied to market interest rates. Specifically, bonds have an “inverse relationship” with interest rates—when market interest rates rise, bond prices fall, and when rates fall, bond prices rise. Thus, all bonds have some level of “interest-rate risk,” and T-notes have more of it than T-bills. Why? If market interest rates rise, new bonds with higher rates will make comparable older bonds with lower rates look less enticing to investors. As a result, the market will price those older bonds lower. This effect is amplified on longer-dated bonds because they have more interest payments remaining.
Put differently: If a bond you hold matures in four weeks, you probably won’t sell it early just because a new short-term bond with higher rates is available. But if your bond matures in, say, five years, you might sell your current bond to buy a bond with higher income potential.
The flip side of this risk? T-notes usually offer higher rates than T-bills. They’re also similarly liquid—yes, they take longer to mature, but you can usually buy and sell them with ease.
8. Short-Term Corporate Bonds
Just like the U.S. government issues bonds to help fund its operations, corporations frequently issue bonds to fund research, development, expansion, you name it.
Generally speaking, corporate bonds have lower credit quality than U.S. Treasury bonds. Credit quality is generally determined by how likely an entity is to pay back its debts—and the credit-ratings agencies believe that just about any U.S. corporation has at least a little (if not a lot) more risk of going under than the U.S. government. Probably a fair bet.
That lower quality does mean more risk—but it also usually means better compensation in the form of higher yields.
Also, “lower quality than Treasuries” doesn’t always mean “low quality.” Many corporate bonds are considered investment-grade, which means the bond rating companies generally deem them likely to be repaid. If you’re willing to accept more risk, you can invest in junk bonds, which are less likely to be repaid but also offer even sweeter yields as a result.
Like with U.S. Treasury bonds, short-term corporate bonds are fairly liquid—they don’t take long to expire, and if you need cash before that, you can typically sell without trouble. And like with T-notes and T-bills, many investors buy these through ETFs and mutual funds rather than individually.
9. Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities, aka TIPS, are designed to protect your money from inflation.
Investors hold TIPS for a fixed period of 5, 10, or 30 years. During that time, TIPS’ principal might head higher or lower. However, when a TIPS bond matures, if the principal is higher than the original payment, you get the principal amount back. If the principal is equal or lower to the original payment, you get the original payment amount back. Also, every six months, TIPS pay a fixed rate of interest until maturity. The interest payment amounts vary as the principal adjusts. Like with other bonds, investors can hold TIPS until maturity or sell them earlier. Also like with other bonds, investors frequently choose to hold TIPS via bond funds.
The argument for TIPS as a cash alternative is they’re fairly liquid and protect your investment against inflation. The downside is that yields are often low to even negative—so while it will protect your money from inflation, and while they’re low on risk, they might not make you much money, especially during periods of low inflation or deflation.
10. Short-Term Bond Funds
Like I’ve been saying for the past few sections, you can buy T-bills, T-notes, TIPS, and corporate bonds through short-term bond funds, be they mutual funds, ETFs, or closed-end funds (CEFs).
When you purchase shares of a bond fund, your money is pooled with other investors’ money, which is collectively invested in debt securities. Which securities the fund invests in is determined by either a human manager(s) or a rules-based index, but either way, there are typically at least some guidelines governing what the fund can and can’t purchase.
The fund distributes income regularly to investors, who also enjoy any price gains (or absorb any price losses) from the shares over time. In exchange, you pay at least one fee—annual expenses that are automatically taken out of the fund’s performance. (Mutual funds also might charge other fees, such as sales loads that are taken out of your initial investment.)
Short-term bond funds are generally considered low-risk investments not just because of what they invest in, but how much they invest in. If you only invest in a few individual bonds, the failure of a single bond could have a significant pull on your nest egg. But bond funds invest in hundreds if not thousands of debt securities, so the failure of one or two won’t affect the portfolio much. Also, risk is relative—a junk bond fund might be less risky than owning one or two junk bonds, but it’s still much riskier than owning investment-grade corporate bonds or Treasuries.
These funds are also great cash alternatives because it’s fairly easy to buy and sell shares without affecting their price.
Cash Alternatives: Compare and Contrast
|Account/Investment||Yield Range||Liquidity||Recommended Offer|
|Checking Accounts||0%-0.10%*1||Very High|
|High-Yield Savings Accounts||0.0%-5.0%+*||High||Step Banking|
|Certificates of Deposit||2.0%-5.0%+*||Low||CIT Bank CD|
|Money Market Accounts||0.0%-5.0%+*||High||CIT Bank MMA|
|Money Market Mutual Funds||2.0%-6.0%+*||OK**|
|Treasury Bills||0.1%-6.0%+*||OK**||Public.com's Treasury Account|
|Short-Term Corporate Bonds||2.0%-9.0%+*||OK**|
|Treasury Inflation-Protected Securities (TIPS)||-1.0%-4.0%*2||OK**|
|Short-Term Bond Funds||0.5%-9.0%+*||OK**|
|* Historically. Yields vary over time; current yields are within this range.
** This is a very liquid investment. However, it's not as liquid when compared to other cash alternatives given the additional steps needed (selling the asset, waiting for settlement, withdrawing cash from investment account, plus any applicable tax considerations) to convert the investment to cash.
1 Typically 0%. Some high-yield checking accounts yield well more than the listed range.
2 TIPS can have negative yields. See story explainer about returns.
Other Cash Alternatives: Short-Term Alternative Investments
Now, I’ll dig into a few off-the-beaten-path cash alternatives. You won’t find these at your local bank or in your brokerage account, but they might be worth considering depending on your financial situation.
Real Estate-Linked Short-Term Financing
Alternative investments is a catch-all term for any investment that doesn’t fall into the categories of stocks, bonds, or cash. It covers a wide variety of investments, from real estate to fine art to sneakers, and it has become increasingly popular as fintech services have opened up once-restrictive markets to the individual retail investor.
Often, because of the less transparent nature of these investments, they’re limited toward investors with more financial resources and understanding—namely, accredited investors. These investors meet certain financial requirements (or qualify with recognized credentials) and can gain access to investments that can offer compelling risk-reward characteristics.
Below, I’ll highlight one such option from EquityMultiple, a crowdfunding real estate platform focused largely on commercial real estate investments.
EquityMultiple’s Alpine Notes (Accredited investors only)
Are you an accredited investor looking for a short-term investment with attractive returns? Meet EquityMultiple’s Alpine Note series.
Alpine Notes are a savings alternative with competitive rates of return on three-, six-, and nine-month notes, providing another means of conservative diversification and short-term yield. Compared to the commercial real estate crowdfunding platform’s other investment offerings, these notes are extremely short-term in nature, and thus an optimal choice for EquityMultiple users who want better liquidity.
While the notes aren’t as liquid as a savings account, they do offer maturity dates that tend to be shorter than your typical CD—and significantly higher rates of return. While this product isn’t FDIC-insured, EquityMultiple does add a degree of protection by assuming the first-loss position in case of default. That means EquityMultiple will purchase a small portion of the aggregate notes issued in a series and will only receive payments after all other investors receive their total principal and interest. Such an arrangement puts their capital at risk, adding skin in the game and aligning their interests with yours.
In case you’re wondering what EquityMultiple does with your funds that justifies paying you such a healthy return, the platform takes the capital you provide and uses it as a line of credit to sponsors who bring real estate investments to EquityMultiple’s core investment platform. The credit allows sponsors to receive surety of funding on initial closing, thus attracting more high-quality investments from high-quality sponsors.
With EquityMultiple’s Alpine Note, you’ll need to be both an accredited investor and have at least $5,000 to participate. If you’re interested in accessing higher yields than traditional CDs or money market accounts, the Alpine Note series is one of the simplest and most efficient ways to take advantage of EquityMultiple’s real estate investment opportunities without tying up your money long-term.
Various Income-Focused Alternative Investments
Alternatives don’t just mean real estate, however. It covers a wide variety of investments, from real estate to fine art to sneakers, and it has become increasingly popular as fintech services have opened up once-restrictive markets to the individual retail investor.
Yieldstreet is one such platform leading the charge to provide access to income generating assets in a number of asset classes.
Yieldstreet is an alternative investment platform that provides you with income-generating opportunities. These investment options come backed by collateral, typically have low stock market correlation, and span various asset classes. Such asset classes include:
- Art finance
- Real estate
- Commercial finance
- Legal finance
- And more
Yieldstreet, which has been in business since 2015, has returned more than $2.2 billion to its investors since its founding.
Yieldstreet currently boasts a net annualized return (measured by internal rate of return, or IRR) of 9.6% across all its investments since inception. But that’s an average: Historically, annual returns range anywhere from 3% to 18%, depending on the goal-based strategy. Yieldstreet offers predefined payment schedules (e.g., monthly or quarterly payments), and they may pay principal and interest upon the occurrence of certain events, such as settlement within a legal finance investment.
The durations of investment opportunities range from three months to seven years. Investment minimums start as low as $10,000, but can go well into mid-five digits.
Yieldstreet technically is open to all investors, as non-accredited and accredited investors alike can participate in the Yieldstreet Prism Fund. However, you must be an accredited investor to participate in all other Yieldstreet offerings.
Learn more, and consider accessing these passive income investments, by opening an account today.
Do Cash Alternatives Compound?
Many cash alternatives compound. For some, like dividend-earning stocks or bond funds, you need to manually make sure your dividends are set to reinvest. Other cash alternatives, such as a high-yield savings account, will automatically compound.
However, some cash alternatives, such as a non-interest-bearing checking account, don’t compound your money at all.
How to Choose Cash Alternatives
1. Consider liquidity needs
Liquidity is essential for cash alternatives. If your cash is untouchable, it doesn’t work well as a cash alternative. Consider how quickly a cash alternative can be converted to cash if you need it.
2. Is the product federally insured?
When products are federally insured, your money is safe—even if the financial institution that holds it fails. For example, if you have your money in a checking account, and the bank goes under, the FDIC will pay you directly by check up to the insured balance in each applicable account.
3. If an investment, is the product registered with the SEC?
One of the duties of the U.S. Securities and Exchange Commission (SEC) is to regulate the offer and sale of all securities, which includes those sold by private companies. Corporate bonds, for instance, are a security that must be registered with the SEC. Not all security offerings need to be registered with the SEC, though.
The SEC makes sure a company’s registration statements comply with their disclosure requirements, but it doesn’t evaluate whether a security is a good investment. In other words, it’s easier to look up accurate information about a company if it’s registered with the SEC, but just because a company is registered doesn’t mean it’ll make you money.
4. Does the risk profile match your risk tolerance?
While most cash alternatives are low-risk investments, some are a bit riskier. Choose investments that align with your risk tolerance. Many people choose to have multiple types of cash alternatives that range in level of risk.
Should You Invest in Cash Alternatives?
In short, yes. You should always have some of your money in cash alternatives. If you don’t, you’re losing money over time to inflation. Cash alternatives should be part of every person’s investment strategy.
Cash Alternatives: FAQs
Do you pay taxes on interest earned in cash alternatives?
Usually, yes. If you receive interest payments, even for very small amounts, in most situations the interest earned is taxable.
However, there are some exceptions. For example, long- and short-term government bonds alike are typically tax-free at state and local levels, but investors still owe taxes on a federal level. If you keep cash alternatives in certain tax-advantaged accounts, such as a Roth IRA, you can avoid all taxes on earnings (assuming you don’t make early withdrawals).
Should you keep any cash on hand?
If you’re wondering whether you should keep physical cash on hand, yes, it can be useful to keep a minimal amount of cash around in case of emergency. For instance, if you live in an area prone to natural disasters and one strikes, physical money can be useful if credit card machines and ATMs are temporarily down.
If you’re wondering whether you should keep some cash in completely liquid accounts, yes—anything that you might need to spend on both day-to-day expenses as well as emergencies should be kept in a basic checking or savings account. Depending on your needs for any additional cash you might have, you can decide whether a more-liquid or less-liquid cash alternative is suitable for you.
How much cash should you hold as part of your broader investment strategy?
You should have a fully funded emergency fund stored in a very safe, liquid, preferably interest-bearing account, such as money market accounts or high-yield savings accounts. But you don’t want much of your investment portfolio to be in cash.
It does make sense to carry a little cash in your investment portfolio so you can take advantage of investment opportunities that arise without selling your existing positions. For instance, if a stock you’ve been monitoring dips to a level that you would consider a value, you’d want to be able to buy it without selling your current stocks.
Consider keeping between 2% to 10% of your portfolio in cash or cash equivalents. Many people aim for around 5%.
Are stocks and funds considered cash equivalents?
Stocks are absolutely not cash equivalents. While they’re typically very liquid, stocks can fluctuate too much in value—thus, they can lose money quickly—to be considered a true alternative to cash.
The same can largely be said about mutual funds, ETFs, and CEFs that hold stocks, long-dated bonds, and other riskier securities. While you can sell them quickly in a pinch, their potential to lose value quickly disqualifies them from being considered true cash equivalents.
Related: Best Quicken Alternatives