Why cash still matters
Why cash still matters: protecting savings when rates and inflation move
Interest-rate swings and persistent inflation have changed how many savers think about cash. Rather than losing purchasing power on a low-yield checking account, a few strategic moves can preserve liquidity while earning competitive returns and limiting risk.
Core principles to follow
– Prioritize liquidity for your emergency fund: access matters more than small differences in yield.
– Protect purchasing power: choose vehicles that offer returns that can keep pace with inflation over time.
– Stay within safe bounds: use FDIC- or government-backed options for core cash reserves to limit principal risk.
Smart places to park your cash
– High-yield savings accounts: Online banks and credit unions often offer rates well above traditional brick-and-mortar banks.
These accounts combine instant access with FDIC or NCUA protection and are ideal for short-term needs and the primary emergency fund.
– Money market funds and cash management accounts: Brokerage cash management and prime money market funds provide easy transferability and competitive yields.
Note that most money market funds are not FDIC-insured; they’re regulated differently and typically highly liquid, but check the sponsor’s disclosures.
– Certificates of deposit (CDs) and CD laddering: CDs lock in a rate for a set term, which can be useful when rates are attractive.
Laddering—staggering maturities—creates a steady cadence of reinvestment opportunities while improving liquidity compared with a single long-term CD.
– Treasury bills and TIPS: Short-term T-bills are highly liquid, backed by the government, and available via brokerage or direct purchase. Treasury Inflation-Protected Securities (TIPS) offer inflation-adjusted principal, making them a solid choice for longer-duration reserves focused on preserving real value. Be aware that TIPS can have tax implications on inflation adjustments even if you don’t sell.
– Series I savings bonds: These bonds combine a fixed component and an inflation-linked component and are exempt from state and local income taxes. They have purchase limits and holding-period rules, so they’re best as a supplemental inflation hedge rather than primary emergency funds.
A simple allocation approach
– Immediate bucket (0–1 month of expenses): Keep in a checking account or instant-access high-yield savings for everyday needs.
– Short-term bucket (1–6 months): Use high-yield savings or a money market fund for the bulk of an emergency fund—balances remain accessible while earning a reasonable yield.
– Medium-term bucket (6–24 months): Ladder short-term CDs or T-bills to capture higher yields while maintaining predictable access at staggered intervals.
– Inflation-protection bucket (beyond 24 months): Consider TIPS, I bonds, or a diversified bond sleeve to preserve long-term purchasing power.
Tax and safety considerations
– Confirm FDIC/NCUA coverage and know whether institutional accounts or sweep arrangements change insurance treatment.
– Understand tax treatment: interest from bank and brokerage accounts is taxed as ordinary income; TIPS and some inflation products can generate taxable “phantom” income; I bonds defer federal tax until redemption and avoid state and local tax.
– Reassess as conditions change: monetary policy and inflation dynamics evolve, so periodically review rates on savings, CD spreads, and Treasury yields to make optimal choices.
Making cash work means balancing convenience, safety, and real return. With a layered approach—immediate liquidity, short-term yield, and inflation protection—you can preserve emergency funds, capture attractive yields when available, and keep purchasing power intact without taking unnecessary portfolio risk.