At some point in your career, you will look at your bank account and see that you have a significant amount of money just sitting there doing nothing. If you grew up like me with parents that didn’t have great financial knowledge, you likely have no idea what to do with this cash.

Everyone is likely telling you to dollar cost average and put it in the stock market because over the long run they think the stock market only goes up. But maybe you are a bit risk-adverse and just want a safe place to park cash in case of an emergency or for whatever reason.

Surprisingly most do not know that there are several safe and virtually no risk options available that not only protect your principal but also offer decent returns.

Disclaimer: Buyside Hustle is in no way, shape or form a financial advisor. Any piece of advice you learn in this article is the opinion of the author and can change at any time. In other words, make your own decisions.

Best Cash Investments Depend on The Risk-Free Treasury Rate

To determine the best place to park your cash, you need to understand what the Federal Funds rate (AKA “Fed Funds rate” or the risk-free rate) is and the Federal Reserve’s stance on interest rate policy. Changes in the Fed funds rate can have big effects on financial markets, including interest rates on loans (e.g., mortgages, car loans), savings accounts, and investment returns as it sets the benchmark rate that everything is based on.

The Federal Funds rate is the interest rate at which depository institutions (such as banks and credit unions) lend reserve balances to other depository institutions overnight. This rate is set by the Federal Reserve and can change overtime.

The Federal Reserve uses the Fed Funds rate as a tool to influence the country’s monetary policy and achieve its dual mandate of 1) promoting maximum employment and 2) maintaining stable prices (preventing high inflation or deflation). By raising or lowering the target fed funds rate, the Federal Reserve can control the money supply, influence borrowing and spending, and stabilize the economy.

When the economy is growing too quickly, and inflation is rising, the Federal Reserve may raise the Fed Funds rate to slow down borrowing and spending, which has the effect of cooling down the economy and preventing excessive inflation. During times of economic slowdown or recession, the Federal Reserve may lower the Fed Funds rate to encourage borrowing and stimulate economic activity.

Currently the Fed Funds rate is over 5%, the highest it’s been since the 2008 Financial Crisis, which gives savers a good incentive to not spend money since you can now make good risk-free returns on your cash.

Best Ways To Invest Your Cash Risk Free Today

It’s not that hard to earn a significantly virtually risk-free higher return in this environment. There are many options out there to park your cash that provide you with the same level of risk as money kept in a bank account.

1) Paydown of Debt

Paying down high-cost debt is the best investment you can make with your cash today. It’s a guaranteed return on your cash as you no longer accumulate fixed interest on your debt on the amount you pay off.

When I purchased my home, I used a home equity line of credit (HELOC) to finance a portion of the purchase price. At the time the rate on my HELOC was 3%, which was an amazing rate (basically free money). After the fed raised the Fed Funds rate to 5%, the rate jumped all the way to close to 9% since it was floating rate!

At 3% it made no sense to pay off ever as it’s impossible to find debt as cheap as that. Especially because debt used to purchase a home is tax deductible, so the rate that I was paying in reality after taxes was really ~2%.

Once the rate rose, I paid off the HELOC completely as it was a guaranteed 6-7% after-tax return on my cash.

Pros:

• Guaranteed Return: Paying down high-interest debt offers a risk-free return on your cash by reducing interest charges
• Improved Financial Health: Lowering outstanding debt balances improves your creditworthiness and financial flexibility
• Psychological Relief: Being debt-free provides a sense of security and peace of mind

Cons:

• Opportunity Cost: By using cash to pay off debt, you forego potential investment returns (but could be easily be losses if you make poor investment decisions)
• Limited Liquidity: Once you use the cash to pay down debt, you no longer have that cash safety cushion in case of emergencies
• Loss of Tax Deductions: Depending on what type of debt and how much you make, you may be losing out on meaningful tax deductions from paying down your debt. That is why when thinking about if you should pay off your debt or not, you should always look at the rate you are paying on an after tax basis (i.e if your mortgage rate is 4% annually, but <3% after-tax because interest on home mortgages is tax deductible)

2) Short-Term Treasury Bills

Given how much the Federal Reserve has raised the Fed Funds rate over the past few years, anybody can get over a 5% interest rate on cash they have if they choose to buy short term 1 month US treasury bonds. Just look where US Treasury rates are below:

Investors all around the world view US treasury bonds as bulletproof and essentially risk free, as the US has never defaulted on its obligations. In other words, buying a short-term treasury bond is basically the safest place to invest cash.

As you invest longer out the Treasury Curve, you start being exposed to what they call “duration risk” in finance. This is where you can lose value on long-term bonds due to fluctuations in interest rates. But by buying on the short end of the Treasury Curve, you just need to hold your Treasuries to maturity and there is no risk of principal loss.

Pros:

• Highest Safety: Backed by the U.S. government, Treasury bills are among the safest investments available
• Regular Interest Payments: T-bills provide predictable interest payments throughout their short duration
• Liquidity: If you ever need cash today for an emergency before, T-bills are highly liquid and can be sold in the secondary market before maturity
• Tax Efficient: Interest/Dividends from Treasury securities issued by the US government is only taxed federally and not at the state level, so if you live in a high tax state like NYC (which is taxed even higher than NY state if you live in Manhattan) or California, then makes a lot of sense to own Treasuries as you save ~5-11% in taxes.

Cons:

• Rates Will Go Lower If The Fed Cuts Rates: Before 2022, T-bills never had high interest rates since the Fed kept rates at zero. So, there is a risk that these 5%+ rates don’t last forever.
• Interest Rate Risk: T-bill returns may not keep pace with inflation if inflation runs above the rate paid on T-bills, potentially eroding purchasing power
• Takes Effort To Purchase Directly: To buy T-bills, you must have a brokerage account set up and know how to navigate your way to buy. It’s not hard, but it’s not as easy as depositing money into some bank account.
• Short Maturities Require Constant Purchases: Once the T-bill you purchase matures, you must reinvest the proceeds into a new T-bill. Some brokerages have functionality where they automate this for you, but it takes some knowledge of navigating your brokerage site to figure out how to do this.

3) Short-Duration Treasury ETFs

ETFs are an indirect and easier way of purchasing a mix of stocks/bonds with just one security. It’s what the vast majority of people invest in because it’s easy.

A T-bill ETF like SPDR Bloomberg 1-3 Month T-Bill ETF (Ticker: BIL) provides a way to easily purchase short term T-bills without having to go through all the hassle of purchasing the T-bill directly and having to reinvest proceeds every few months after maturity.

Pros:

• Diversification: ETFs offer exposure to a diversified portfolio of short-term Treasury securities
• Low Expense Ratios: Short-duration Treasury ETFs typically have lower expense ratios than actively managed funds
• Intraday Trading: ETFs can be bought and sold throughout the trading day, offering liquidity and flexibility

Cons:

• Market Volatility: While Treasury ETFs are relatively low-risk, they are still subject to market fluctuations. But in reality, the price of a 1-3 Month T-bill ETF doesn’t move much – the price only really changes significantly if you buy longer duration ETFs depending on how fast interest rates move.
• ETF Fees: You won’t get as much interest from dividends on ETFs as you would if you purchase T-bills directly, but the fees are not that significant (likely <0.2% per year) depending on the ETF
• Taxes: Depending on the ETF, you may have to pay taxes on the state level as well on interest/dividends.

4) Money Market Funds

Money market funds provide the most liquid way to hold cash but still provide you with a high rate of risk-free interest. Most brokerage accounts automatically invest any cash you keep there in money market funds.

Currently with the Fed Funds rate above 5%, money market funds like SPAXX on Fidelity pay ~4.8% interest on cash. You can withdraw this cash out at anytime into other accounts to use and don’t have to sell anything like you would if you owed T-Bills or ETFs.

Pros:

• Liquidity and Stability: Money market funds aim to maintain a stable $1 NAV, providing daily liquidity and capital preservation.
• Diversification: These funds invest in short-term debt securities, spreading risk across multiple issuers.
• Low Minimum Investment: Money market funds often have low initial investment requirements.

Cons:

• Modest Returns: The conservative nature of money market funds results in lower yields compared to actually owning T-Bills directly. But the difference is small.
• Expense Ratios: While expenses are relatively low, they can impact overall returns, especially during periods of low interest rates.
• Taxes: Unlike Treasuries, interest on money market funds are taxed at the state level so not a tax efficient way of investing your cash.

5) Short-Term CDs

CDs are one of the more popular ways to generate risk-free interest with your cash and are offered by most banks out there.

Pros:

• Fixed Returns: Short-term CDs offer predictable returns with fixed interest rates over the CD term. For example, if you invest $100K in a 2-year CD at a 4% interest rate, you will get paid $8K of interest after 2 years.
• FDIC Insurance: CDs are FDIC-insured up to $250K per bank, so if the bank fails, you won’t lose the $250K.
• Easy: The bank you use will likely offer some sort of CD product, so makes it easy to use any many in your bank and invest in CDs.

Cons:

• Early Withdrawal Penalties: Accessing funds before CD maturity may result in penalties and reduced returns, so don’t invest in long-dated CDs if you think you may need to have access to the cash before they mature
• Opportunity Cost: The fixed nature of CD rates means you may miss out on higher interest rates if market rates rise. If you invest in a 5-year CD at x% and the 5-year rates go higher, then you won’t get the higher rates since you were locked in the lower rate.
• Low Interest Rate Compared to Alternatives: CDs will almost always be less than what you could get in Treasuries.
• Taxes: Unlike Treasuries, interest on CDs are taxed at the state level so not a tax efficient way of investing your cash.

5) High Yield Savings Account

Another popular option is just a typical high yield savings accounts offered by all the banks.

Pros:

• FDIC Insurance: Accounts are FDIC-insured up to $250,000 per depositor, per institution.
• Easy Access: Funds in a savings account are liquid and readily available for withdrawals whenever.

Cons:

• Low Interest Rates: Typically, most high yield savings accounts offer less of an interest rate relative to treasuries. But there are some banks like Marcus by Goldman that offer pretty high rates of interest relative to competitors.
• Limitations on Transactions: Federal regulations may restrict the number of withdrawals from savings accounts.
• Taxes: Unlike Treasuries, interest made in a high yield savings account is taxed at the state level so not a tax efficient way of investing your cash.

Banks – The Worst Place To Park Your Cash

Immigrants and the middle class are notorious for keeping large sums of money in their bank account. My parents were both growing up, and they were extremely risk adverse with their investments and basically kept a lot of cash in the bank earning virtually no interest. If you have more than $5K or $10K sitting in your bank account (basically whatever you need to live day to day and pay expenses), you are not getting the maximum amount of risk-free return possible.

Checking or most savings accounts at banks are the worst place to park your savings as they pay you the lowest rate out of anyone else out there. Sure, you trust the bank and your account is insured up to $250K per year, so you’ll never lose the cash sits there. But if there are other places to park your cash that give you a better return with no risk of losing money, why would you still keep money in the bank?

Reasons Why Cash In The Bank Is Trash

1) Inflation Erodes Your Cash Over Time

One of the primary concerns with holding large sums of cash in a bank account is the risk of inflation. Over time, inflation erodes the purchasing power of your money, meaning that the same amount of cash will buy fewer goods and services in the future. The low-interest rates typically offered by bank accounts may not keep pace with inflation, resulting in the diminishing value of your savings over time.

Paper currencies are designed to go to zero over time. It is guaranteed that there are going to be more dollar bills circulating in the system 10 years from now compared to today. Just look at any third world country that has run into debt issues. Their currencies have inflated to zero and inflation has been rampant.

That’s why some people think Bitcoin is going to $1 million per coin over time. Whether that happens or not time will tell. But you want to keep money in cash, then it’s much better to explore all the options that basically prevent/slow the erosion of that purchasing power over time.

2) Banks Pay Extremely Low Rates Of Interest

Banks make money by taking your deposits, paying you virtually nothing for them in interest, and then using your cash to make them money. They do this by investing your deposits in higher rate loans/securities and keeping all the profits for themselves.

3) Missing Out on Compound Growth

Investing your money wisely can lead to compound growth, where your returns generate additional returns over time. This compounding effect can significantly accelerate wealth accumulation. By keeping large sums of cash in a bank account, you miss out on the power of compounding by investing in assets that have the potential for higher terms, which can be a vital factor in building long-term financial security.

Achieving a Top 1% Net Worth

Parking your cash in treasury bills or money market funds is not a way to achieve a top 1% net worth unless you already have millions of dollars saved in the bank. To get rich with a finance career, you must focus first on increasing your income and keeping your expenses low to save a large amount of money.

Once you have a large chunk of money saved, you can start making money passively by letting that money work for you. For example, $1 million in today’s environment with the Fed Funds at >5% can make you somewhere $50K+ a year by doing absolutely nothing except investing in short term Treasury Bills.