Consider cash alternatives if you have money lying idle in your checking account and earning near-zero interest.
But with several options to choose from, it’s easier said than done.
Mainly because most available resources on this topic describe and sell some cash alternative product or another. They seldom help you understand the matter and decide for yourself.
Public, however, is all about helping you be better investors. So here’s a detailed overview of cash alternatives, crafted to make you self-sufficient on this subject.
What are cash alternatives?
Cash alternatives are financial instruments that you can use instead of holding (idle) cash in your bank account. Cash alternatives include treasury bills, high-yield savings accounts, CDs, money market accounts, bonds and more options. The right choice depends on factors such as access, risk preference, and the interest rate offered
Earning higher interest on your cash balances is the primary reason for using cash alternatives. They are particularly useful when ordinary bank accounts provide near-zero interest rates. In September 2022, for example, the average interest rates of U.S. banks were 0.03% for checking accounts and 0.06% for savings accounts.
Besides generating higher yields, these instruments help you with diversification or the strategy of putting your money in multiple investments instead of one or two. This helps balance your portfolio when some investments don’t perform well, thus minimizing losses.
Some standard “cash-like” asset classes
Now that you know what they are, let’s discuss some of the commonly used cash equivalents.
- Treasury Bills: Commonly known as T-Bills, these are securities issued by the U.S. Treasury, ranging between $100 to $5 million, maturing in less than 1 year. You basically lend money to the U.S. government by purchasing T-Bills.
Want to know more about what are the other differences between high yield savings account vs treasury bills? We have a detailed guide that talks about benefits, risks, taxes to help you make an informed decision
How to choose a cash alternative?
Most cash equivalents are low-risk investments. But you must still consider the following factors closely when choosing one for your portfolio.
- Is the instrument liquid enough so that you can withdraw funds in case of any emergency? For example, CDs usually lock up your money for a fixed period. That’s why Public helps you gauge the liquidity of cash equivalents by interacting within the community and learning from the experience of your peers. That too, with a single app.
- Is the product FDIC-insured and/or registered with the U.S SEC, etc? The second parameter applies specifically to money market funds.
- Does the product’s risk profile match your investment strategy and risk tolerance? Certain cash alternatives, like money market funds, can have some degree of risk/volatility involved. Some of these risks are related to current market dynamics and fluctuations, as well as inflation. You can understand them with real-time updates and expert insights available on Public Live.
Besides everything else, you must have clarity about your investment objectives. Because, if your goal is investing for a longer term — say, saving for your retirement — then it may be advisable to choose other investments like bonds or stocks. These instruments may potentially provide better returns over the long term than cash alternatives.
Public’s Long-Term Portfolio feature gives you a dedicated dashboard segment for your long-term investments, keeping them from the short-term ones. This makes handling your cash equivalents and long-term investments from a single dashboard even easier.
Lastly, you can unleash high-quality, advanced market data, analyst insights, and performance metrics by upgrading your portfolio with Public Premium. So, join us now to experience next-level cash management and investments.