For years when clients asked me where they should leave their cash (possibly for their Emergency Fund or upcoming expenses) the answer was always the same: Leave it wherever it’s the most convenient for you because with the Federal Reserve targeting a 0% Fed Funds rate no one will pay you for your cash. 

But since March 2022 the Fed has gone from a Fed Funds target of 0.00% to 0.25% to a target of 5.25% to 5.50%.

So now where do you park your cash?

Below are the three main choices available to you, along with the pros and cons of each. I also included the current rate for each that I see on the Ally Bank, Bankrate.com, and Vanguard websites.

Bank/credit union savings accounts (current=.02% to 4.25%)

• Pros-very easy to access your money when you need it; should (see “Cons”) pay more as the Fed raises rates; deposits up to $250k are covered by FDIC insurance and therefore safe; the most “liquid”* option
• Cons-the interest rate paid is dependent on the whims of the bank/credit union and how badly they want your deposits

Bank CDs (current 1-year CD rate=5.25%)

• Pros-you’re locking into a set rate for a given period of time (this could be a “Con” if the Fed continues raising rates); deposits up to $250k are covered by FDIC insurance and therefore safe; since you’re buying an investment product directly there will be no fees paid to a “middleman”, like you see with money market funds; if you hold until maturity you’ll receive what you paid for the CD along with the interest the CD paid
• Cons-it’s a more involved process to purchase (you can find CD’s offered by many banks across the country at Bankrate.com or purchase CD’s through your brokerage account at Vanguard, Schwab, Fidelity, etc.); you’re locked into the investment until the CD matures and if you want the money before the maturity date you’ll have to pay a penalty; because you’re locked in to holding a CD until the maturity date it’s the least “liquid” option

Money market mutual funds (current rate=5.28%)

• Pros-it’s very easy to purchase; their rates move in lockstep with the Fed Funds target rate (albeit with a lag); they have a stable $1 share price so you can’t lose money; although they aren’t protected by FDIC insurance I would argue they’re just as “safe” as bank deposits
• Cons-if you need the money immediately there may be a 1-business day lag between the time that you sell it and the time you can access the cash; if rates start to go down you’ll eventually earn lower rates; there is an expense ratio associated with mutual funds which puts a damper on the rate you receive

*”Liquid” is a term used to describe how easily/quickly you can receive your money back. The most liquid vehicle would be cash bills, but a close second would be a bank checking account that has a debit card.