In recent years, investment alternatives to cash have gained in popularity. Part of this began with the sharp rise of interest rates in 2022. In this new interest rate environment, investors have been able to earn higher returns on investment alternatives to cash while still taking limited amounts of risk. In fact, according to Federal Reserve data, money market fund deposits grew by 39% from the 4th quarter of 2022 to the 4th quarter of 2024 (Source: St. Louis Fed). 

There are many investment alternatives to cash, but today we’re going to take a closer look at three options: money market funds, certificates of deposit or CDs, and bonds. 

What is a Money Market Fund? 

Money market funds are a type of mutual fund that invests in low-risk, short-term, debt securities. They’re designed to offer you a safe, stable, investment option for money that may be needed for an emergency or short-term goal. Money market funds are an investment product and usually offered within a brokerage account. They are different than money market accounts that may be offered by a bank or credit union. 

What are the pros of Money Market Funds? 

• They are meant to be safe and not intended to lose value. 
• They are liquid and you can withdraw your cash at any time without penalties. 
• They often have higher yields than a regular bank savings account. 

What about the cons? 

• Money market funds don’t carry FDIC insurance like a bank account or CD might. Money market funds may be eligible for coverage under SIPC when held in a brokerage account. 
• Because a money market fund is a mutual fund, it can sometimes take a few business days to transfer cash to your bank account. Shares will need to be sold, settled, and transferred so make sure you plan time for money movement. 
• The rate of return you receive can fluctuate based on the interest rate environment. If rates go down, your yield will likely follow. 

In summary, a money market fund is a liquid, stable investment where you can earn a flexible rate of interest over a given period of time. 

What is a Certificate of Deposit? 

You will most often hear of a certificate of deposit referred to as a CD. A CD is a type of savings account that pays a fixed rate of interest on money held for a set period of time. These set periods of time can vary depending on your time horizon. Common CD terms are three, six, and 12 months but can sometimes range up to 10 years. CDs are often issued by a bank or credit union. If that bank or credit union is backed by the FDIC or NCUA, your deposit may be insured against loss, making it an extremely safe investment. 

What are the pros of CDs? 

• Rates are typically higher than money market or savings accounts 
• The rate of return is predictable and locked in for the term of the CD. If you need to earn a certain rate of return over a specific time period, then a CD could be a good option. 
• CDs are generally insured against loss if opened with an FDIC or NCUA insured bank or credit union. There are limits to dollar value that is covered by insurance, so be sure to check with the issuer and confirm your coverage levels. 

What are the cons of CDs? 

• If you withdraw funds prior to the maturity date, you may be subject to penalties that limit your investment return. 
• If interest rates go up during your holding period, you may miss out on maximum upside. For example, if you own a 12-month CD paying 4%, and three months into your holding period rates go up to 5%, you will spend nine months earning less interest than what is available to you in the market. 
• In summary, CDs could be a good option if you are looking for a set rate of return that is backed by FDIC or NCUA insurance. Just be wary of the lack of flexibility if you end up needing to withdraw funds sooner than expected. 

What is a Bond? 

Bonds are issued by the government or individual companies and pay a stated rate of interest called a coupon payment. They offer varying rates of interest and overall return based on the quality of the issuer, length of the bond term, and overall attractiveness to buyers. 

With a bond, you are essentially loaning money to the issuer where they agree to pay you back your money on a set maturity date in the future. They also agree to pay you interest along the way, generally semi-annually in the form of coupon payments. 

They are generally viewed as less volatile than stocks but still carry risk. The risk of a bond is measured through a credit rating. Companies with a higher credit rating are thought to be less likely to default than a bond issuer with a lower credit rating. Bond issuers with lower credit ratings often have to pay a higher rate of interest to make their bonds attractive and compensate investors for taking the risk of buying them. 

While there are many different types of bonds and bond issuers, let’s focus on those issued by the United States government: U.S. Treasuries. U.S. Treasuries are issued by the U.S. Department of Treasury to raise money needed to operate the federal government. They are considered a safe investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be made on time. While their credit rating was recently downgraded by Moody’s (the global credit rating agency that evaluates the creditworthiness of borrowers), they are still considered a high quality and liquid investment. You can buy Treasuries with various maturities which represent the amount of time before your principal investment is returned to you. These maturities range from 3-months (Treasury Bills) all the way up to 30-years (Treasury Bonds), and most everything in between. 

What are the pros of investing in bonds? 

• There are certain tax advantages that bond holders receive. For example, U.S. Treasury securities are exempt from State & Local Taxes. 
• Bonds also offer the ability for your investment to fluctuate in value. If interest rates fall during your bond holding period, it’s likely that the value of your bond will increase. This is because you now own a bond paying a higher rate of interest than what is available to the rest of the market. This creates demand which can push the value of your bond up on the secondary market. 

What about cons? 

• Well, just as falling interest rates can push the value of your bond upward, the opposite can be true as well. If rates go up, it could push the value of your bond down. Just remember, you have the option to hold your bond until the maturity date where you would receive the par value of your investment back so long as the issuer doesn’t default prior to the maturity date. 
• Another consideration when investing in bonds is that they are not FDIC or NCUA insured like a CD. You want to be sure to vet the quality of the bond issuer prior to investing. 
• Another factor that can hold bond investors back is the overall complexity of investing in bonds, evaluating credit qualities, and selecting appropriate maturity ranges. For this reason, some investors will outsource that task to a professional investment manager. 

Overall, bonds can provide higher upside to investors, but with that upside comes additional risk that should be considered. 

Conclusion 

While any of these could be the right option, which one you ultimately choose depends on your goals, objectives, time horizon, and risk tolerance. Understanding the options along with pros and cons is a great first step towards making a good decision. Talk to your financial professional or reach out to Howe & Rusling to learn more and make sure you’re making the most of your alternative to cash investments. 

Disclosures: Howe & Rusling, Inc. is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. This material is for informational purposes only and is not intended to serve as personalized investment advice or as a recommendation to buy or sell any specific securities or financial products. Investments in money market funds, certificates of deposit (CDs), and bonds involve risks, including the potential loss of principal. Money market funds are investment vehicles and are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. While generally considered low-risk, they are not risk-free. CDs are typically insured by the FDIC (or NCUA for credit unions) up to applicable limits, but early withdrawals may result in penalties and reduced returns. Bonds are subject to interest rate risk, credit risk, and market risk. If sold prior to maturity, bonds may be worth more or less than their original cost. U.S. Treasury securities are backed by the full faith and credit of the U.S. government, but their value may fluctuate with changes in interest rates. Although considered low risk, they are not guaranteed against loss if sold before maturity. Tax considerations vary based on individual circumstances. While interest on U.S. Treasury securities is generally exempt from state and local taxes, it is still subject to federal income tax. Please consult with a qualified tax advisor to understand how these investments may affect your specific tax situation. Past performance is not indicative of future results. Any projections, forecasts, or estimates contained in this material are based on assumptions and are not guaranteed. Market conditions can and do change, often unpredictably. This communication should not be construed as a solicitation or offer to buy or sell any securities or financial instruments, or as a recommendation to adopt any particular investment strategy. Investment decisions should be made based on an individual’s goals, risk tolerance, and financial situation. All investing involves risk, including the potential loss of principal. Diversification and asset allocation do not guarantee a profit or protect against loss in declining markets. Please consider all risks and fees associated with any investment before investing. A prospectus or offering document for money market funds or other investment products should be reviewed carefully before making an investment decision. Data cited from third-party sources (e.g., Federal Reserve, Moody’s) is believed to be reliable, but its accuracy and completeness are not guaranteed and should not be relied upon as such.