Asset Classes - Cash

June 19, 2018

Previously, on Jill’s Journal, I talked about diversification with stocks and bonds, and we then dove into the different ways to diversify. Today is the third of a four-part series on the different types of asset classes, where we are conversing about cash.

asset classes

Cash, or money market, or cash equivalents

Here I am referring to any type of cash, but also this can sometimes include CDs and treasury bills.

Let’s back up. What’s a CD? Is that like a compact disc? (Do people even listen to those anymore?)

A CD is an abbreviation for Certificate of Deposit. These are “certificates” issued by banks with a fixed amount of dollars for a fixed period of time. You give the bank an amount; for example, $5,000 for 3 years, and in return, they give you a higher interest rate than you would get from a savings or checking account. These are what banks use in order to have cash to make loans. The banks make it so that you cannot take your money out during that 3 year period, and therefore they know how much money they have, and for how long, to loan others.


  • You receive a higher rate of interest than keeping the money in a savings account.
  • The CD is insured by FDIC (Federal Deposit Insurance Corporation) for up to $250,000, which means, your money is guaranteed safe up to this amount. You will never lose your principal.
  • You can look around for the best rate. Different banks offer different rates on CDs, depending on the dollar amount and time period. Often, you can find a better rate with an online bank, because their costs are lower.


  • You likely cannot take your money out, before the time period is up, without a penalty. (Some CDs are no-penalty CDs, which mean you CAN get your money out without a penalty, but the interest rate is likely much lower).
  • You might miss out on a better investment opportunity while your money is tied up in the CD.
  • CDs typically don’t keep up with inflation.

Some people create what is called a “ladder” using CDs. This is a type of investment where you structure your cash in different CDs, with the goal of having a CD “mature” (come due, time period is up) each year, so that you are never locked into a time period greater than one year. CDs usually pay a higher rate of interest for the longer time periods, so to get the higher rates, you may have to commit to several years of keeping your money in the CD. To get around the lack of liquidity, you could create a ladder like this (just an example):

1. Put $1000 in 5 different CDs, on Day 1, Year 1, in 2018


2. On Day 1, Year 2, 2019, the 1 year CD “matures”, so now you have your initial $1,000 back, plus the interest your earned during that period. If you don’t need that cash at the moment, you could roll that $1,000 into a 5 year CD, and now your ladder would look like this:


And you keep doing this, rolling the money into a CD that has maturity a year out from your last CD. If you need money, you will always have $1,000 maturing within a year.

The next investment vehicle that is considered to be “like cash” is a money market fund or a money market deposit account. These are similar in that they usually have an interest rate slightly lower than a CD, but higher than cash in a savings account.

Money Market deposit accounts are typically considered to be High Yield Savings accounts. This means that they ARE FDIC insured like the other bank accounts. They often have a high minimum dollar amount required to open one. You may want to consider this type of account for cash that you are saving for an emergency; as in, medium to long-term time-frame but still having almost immediate access to the cash.

Money Market mutual funds (MMMF) are different than checking and savings accounts in that they are NOT FDIC insured. MMMFs are a certain type of mutual fund that invests in CDs and cash-type investments, so that it is usually valued around $1 per share. Technically, your principal is not guaranteed, so it’s not a bank account, and likely will pay a higher interest rate than a bank account would.

Finally, I wanted to touch on T-bills. T-bills stands for Treasury Bills, which are a type of bond, but with a really short maturity. These are backed by the U.S. government so there is almost no risk of losing principal. You can also purchase them for small amounts, and sometimes with maturities as soon as 4 weeks. They typically will provide an interest rate that is lower than a CD or a money market fund, but higher than a savings account.

To recap, here is the hierarchy of interest rates:

hierarchy of interest rates

So, why would I even consider any of these things instead of just putting my cash in a savings account? Or a coffee can buried in my back yard?

Well, you may want to hold cash for safety reasons, and keep your investment liquid, but you might want to earn a better return than just holding cash. Remember, cash that is sitting in your piggy bank on your dresser is earning nothing. Cash in a savings account, while not earning $0, is still not earning very much. If you utilize one of the other cash savings approaches mentioned today, you still have access to your money, and with lower risk than putting it in an investment such as a stock. These types of cash investments are just one more way that you can diversify your entire portfolio.

To recap:

  • Keep cash as cash or in a savings account-when you need access to your money in the short-term
  • Consider a T-bill1-if you are nervous about having your money put into a different account but want to earn more interest than a savings account
  • Consider a high-yield savings account or money market account2-when you are saving for a longer time period but still want easy access to the money
  • Consider a CD3-if you want the highest interest rate for an investment where your principal is guaranteed and you can tolerate having your cash “locked” away from you for a set period of time

Next week we will be addressing the fourth quadrant of investments, real estate and “other” investments.

1 The government guarantee applies only to the timely payment of interest and principal; it does not protect against loss of principal if the security is sold prior to maturity.
2 An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
3 CDs offer FDIC or FSLIC insurance and a fixed rate of return whereas both principal and yield of investment securities will fluctuate with changes in market conditions.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jill Carr and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss.

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