Where Should I Put My Cash?

One of the most common questions I hear is deceptively simple:

“Where should I keep my cash?”

The right answer depends on what the cash is for, how soon you’ll need it, your tax situation, and how much risk you’re actually taking (versus how much risk you think you’re taking).

This question is especially timely right now. The Federal Reserve has recently reduced the Fed Funds Rate, which means yields on cash‑like investments are starting to come down.

This article walks through the major places people keep cash, how each works, how they’re taxed, and how to think about choosing between them.

First: What Is This Cash Actually For?

Before talking about accounts, it’s critical to separate types of cash:

1. Daily spending cash: bills, mortgage, credit cards
2. Emergency fund: job loss, medical issues, unexpected expenses
3. Near‑term planned expenses: taxes, tuition, home projects, car purchase
4. “I don’t know what to do with this yet” cash

Only the first category truly belongs in checking. Everything else deserves a more intentional home.

The Main Places People Keep Cash

1. Checking Accounts

Best for: Daily spending only

• Yield: Near zero
• Liquidity: Immediate
• Risk: Essentially none
• Insurance: FDIC (up to $250,000 per depositor, per bank - same limit applies to all 5 account types listed below)

Checking accounts are transaction tools, not savings vehicles. Holding large balances here creates a guaranteed loss of purchasing power over time due to inflation.

Rule of thumb: Keep 1-2 months of expenses, nothing more.

2. Standard Savings Accounts

Best for: Convenience, not optimization

• Yield: Very low
• Liquidity: Immediate
• Risk: Very low
• Insurance: FDIC

These accounts still exist mostly due to a lack of understanding of better options. If your bank isn’t paying competitive rates, you’re effectively lending them money cheaply.

3. High‑Yield Savings Accounts (HYSAs)

Best for: Simple emergency funds

• Yield: Competitive, but adjusts quickly when the Fed cuts rates
• Liquidity: Usually 1-2 business days
• Risk: Very low
• Insurance: FDIC

HYSAs became popular when rates rose, but they’re also among the first yields to fall when Fed rates are lowered. They’re simple and safe, but might be sub-optimal.

4. Bank Money Market Accounts

Best for: HYSA alternative

• Yield: Similar to HYSAs
• Liquidity: Usually 1-2 business days
• Risk: Very low
• Insurance: FDIC

These can often be confused with Money Market Mutual Funds (described later). Despite the name, these Money Market Accounts are still bank products, not investment funds. They behave much like high-yield savings accounts.

5. CDs

Best for: Expenses with a defined timeline

• Yield: Slightly higher than HYSAs
• Liquidity: Depends on the maturity date of the CD
• Risk: Very low
• Insurance: FDIC

Because of the liquidity issues where you often can’t immediately access your funds, I generally don’t find these as viable options, certainly not for emergency funds.

Alternative Places To Consider

1. Money Market Funds (Brokerage)

Money market funds are investment products held at a brokerage, not bank accounts. They aim to preserve principal and provide daily liquidity - but what they invest in matters, especially for taxes.

Prime and Government Money Market Funds

Examples:

• SPAXX (Fidelity)
• VMFXX (Vanguard)
• SWVXX (Schwab)

What they may hold

• Agency securities
• Bank obligations
• Commercial paper
• Repurchase agreements backed by non‑Treasury collateral

Treasury-Only Money Market Funds

Example:

• FDLXX (Fidelity)
• VUSXX (Vanguard)
• SNSXX (Schwab)

What it holds

• Short‑term U.S. Treasury bills

Why this matters

• U.S. Treasury interest is taxable federally, but is exempt from state income taxes
• If you pay 5% state income tax, a 3.5% yielding Treasury-Only Money Market Fund is equivalent to a 3.68% Prime/Government Money Market Fund yield.
• Be sure to let your tax preparer or software know that you invested in these state tax-exempt funds because this is often missed.

Characteristics

• Yield: Often higher than high-yield savings accounts and bank money market accounts
• Liquidity: Usually 2-3 business days (Treasury-Only Money Market Funds can sometimes add 1-2 extra business days since you have to sell those shares to move the money into the settlement fund before withdrawing)
• Risk: Very low
• Insurance: SIPC (keep reading for a brief FDIC vs SIPC comparison)

This combination is why I personally lean toward Treasury‑only money market funds for larger taxable cash balances, in high‑tax states. For states with no income taxes, the standard money market fund each brokerage uses as the settlement fund is my preference.

2. Ultra Short‑Term Treasury Bill ETFs

These fall under the category of bond funds, but they behave very similarly to these other “cash equivalents”

Examples:

• VBIL (Vanguard 0 - 3 Month Treasury ETF)
• SGOV (iShares 0-3 Month Treasury ETF)

What they hold

• Ultra‑short U.S. Treasury bills that mature in the next 0-3 months

Key differences vs money market funds

• Trades intraday like an ETF
• No stable $1 share price target
• Small price fluctuations are possible

Tax treatment

• Taxable federally, but exempt from state income taxes just like Treasury-only money market funds

Municipal Options for High Earners

For very high‑income households, municipal money market funds and short‑term municipal bond funds can sometimes make sense.

• Often exempt from federal taxes
• Sometimes also exempt from state taxes (if you pick a fund specific to your own state)
• Lower listed yields, but potentially higher after‑tax yields depending on your tax bracket
• These options require careful evaluation but can be valuable in the right tax bracket (typically in the 32%+ brackets)

FDIC vs SIPC (And What They Actually Protect)

• FDIC: Protects against bank failure
• SIPC: Protects against brokerage failure

Neither protects against:

• Inflation
• Interest‑rate changes

Warning: Treasury‑only money market funds have a very small risk that they could lose value if the share price drops below $1 during extreme economic conditions (“Breaking the Buck”). Ultra-Short Term Bond ETFs are low risk, but are still investments and could potentially lose value in a rapidly rising interest rate environment.

How Fed Rate Cuts Affect Cash Options

When the Fed cuts rates:

• Savings & HYSAs: Yields fall quickly
• Money market funds: Follow rates down but remain competitive
• CDs: New CDs pay less; existing CDs become more attractive
• Bond funds: Prices often rise while yields fall

Comparison Table: Cash and Cash‑Like Options

How Much Cash Should You Keep?

Emergency fund

• 3 months of living expenses: Stable, low-risk income (2 income earners)
• 6 months: Single income earner or high-risk 2 income earners
• 12 months: Business owners, high-risk single income earners

Near‑term spending (1 - 3 years)

• Car, house down payment, home renovations, vacation, wedding, college expenses, new baby, etc

My Personal Lean

For many clients, I favor:

• Treasury Only Money Market Fund (e.g., VUSXX) for an emergency fund if you are in a state with state income taxes. If not, I would just pick the standard settlement fund (VMFXX, SPAXX, etc) from your brokerage of choice.
• Ultra-Short Term Treasury ETF (e.g., VBIL) for near-term spending or emergency funds if your brokerage doesn’t offer a competitive money market fund.

Final Thought

Take a second and check where your cash is currently being held. Do you have more than 1-2 months sitting in checking/lower yield savings? Do you pay state income taxes? Has your high yield savings rate dropped considerably to where you are missing out on additional yield you could get elsewhere? Have you exhausted a lot of your emergency fund and you need to replenish it?

Cash isn’t all about maximizing return, so be sure to factor in liquidity, stability, and simplicity, but understanding what your “safe” money is actually invested in can meaningfully improve after‑tax outcomes with very little added complexity.