Updated: Sep 05, 2023

Cash-Equivalent Accounts: The Safest Types of Investments

Learn about the cash-equivalent accounts that act as the safe, low-risk investments that provide consistent returns or generate stable income.
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The Different Types of Cash-Equivalent Accounts

For both investors and consumers, there are multiple options when it comes to cash equivalent accounts.

Short-term certificates of deposit (CDs)

CDs are essentially investment contracts offered by banks.

You purchase a certificate for a specific amount of time, which can be anywhere from 30 days to as long as 10 years.

Both the principal value of the certificate and the interest rate are guaranteed by the bank, and fully covered by FDIC insurance for up to $250,000 per depositor, per bank.

CDs typically come with automatic rollover provisions.

For example, if you purchase a six-month CD, it will automatically roll over into another six-month CD upon maturity – unless you specifically opt out of the rollover.

They also assess an early withdrawal penalty that will reduce the amount of interest you will earn on the certificate if you withdraw the funds prior to the stated maturity dates.

CDs are best used to hold funds for a very specific purpose, such as making a down payment on a car in three months.

The CD guarantees both principal and interest paid, so you’ll know exactly how much money you’ll have when the time to make the purchase comes.

However, because of the specific terms, CDs are not the most liquid of cash equivalent accounts.

Money market funds and accounts

A money market is an investment by the issuer in a basket of short-term, interest-bearing securities.

Most commonly, money markets are comprised of short-term U.S. Treasury bills.

Money markets are interest-bearing accounts, though the interest rates fluctuate, sometimes as often as daily based on prevailing market rates.

The principal value of a money market investment is typically stable, though it isn’t guaranteed by the issuer.


They are excellent cash-equivalents because of the combination of safety of principal and interest income.

They’re also totally liquid, which means they can be used for just about any purpose with very little notice.

There are two types of money markets.

Money market account (MMA)

The first is money market accounts, which are issued by banks.

The principal value of these accounts is typically guaranteed, and there may even be a guaranteed short-term fixed interest rate of return.

And since they are issued by banks, they’re also insured by FDIC.

Money market fund (MMF)

Money market funds are issued by investment brokers.

They similarly have variable interest rates, and though brokers make every effort to maintain a stable share value, there is no guarantee that will be the case.

As well, some money market funds trade like mutual funds, and may be subject to certain fees.

As a general rule:

A small amount of any investment brokerage account should be held in money market funds for liquidity purposes.

Savings accounts

Savings accounts work much like money market accounts issued by banks.

The principal value is guaranteed, and though interest rates may be offered at a fixed level on a temporary basis, they’re generally variable in nature.

Savings accounts are excellent cash equivalent accounts, since they can be used for either ready access for emergency funds, or to hold funds for a certain amount of time and for a specific purpose.

However, savings accounts are not as liquid as checking accounts. Under Federal Regulation D, withdrawals from a savings account are limited to no more than six per statement cycle.

(Note: This limitation also applies to bank-issued money market accounts.)

Short-term bonds

By definition, a bond is debt security issued for a term of greater than 10 years.

But you can still purchase bonds on a short-term basis by buying securities that are very close to maturity.

For example, you can purchase a 20-year bond that’s due to mature in six months or less. That may give you the benefit of a higher interest rate from when the bond was issued 19 ½ years ago, as well as very little risk of loss of principal before maturity.

You can buy short-term bonds in this way from a variety of sources.

These include corporate bonds, municipal bonds, government agency bonds, and even bonds issued by foreign corporations and governments.

If you’re interested in short-term bonds, one of the best ways to hold them is through a short-term bond fund.

For example, if you invest in a bond fund that holds bonds due to mature within one year, you’ll be investing in a portfolio of bonds so that you don’t have to choose which securities to invest in.

Bond funds are also highly liquid, so you won’t have to wait until the bonds mature to sell them.

Treasury Bills

Treasury bills are among the most popular cash-equivalents.


They can be purchased at TreasuryDirect for as little as $100, and thereafter in multiples of $100. Terms range from a few days to one year.

The securities are purchased at a discount, then pay the full face amount on maturity.

For example, let’s say you purchase a $100, one-year Treasury bill. You’ll pay $99 for the security, then be paid $100 when it matures. The $1 difference between the purchase price and redemption value is the interest you will have earned on the bill at maturity.

Interest paid on U.S. Treasury securities has the advantage of being tax-free for state income tax purposes. However, it is taxable for federal income tax purposes.

Since rates on Treasury securities change every business day, you can check for updates on the U.S. Treasury Department’s Daily Treasury Yield Curve Rates.

As you can see from the screenshot above, Treasury bills have maturities ranging from one month to as long as one year.

Interest rate yields generally increase the longer the term of the security.

The Purpose of Cash-Equivalent Investments

Cash-equivalent investments have four primary purposes:

Capital preservation

Since they’re short-term in nature, and interest-bearing, values don’t fluctuate much, if they do at all.

This makes them the perfect place to park money during times of financial turbulence.

They’re even safer than bonds, since bonds do have the potential to decline in value, particularly in a rising interest rate environment.

To ride out a rising interest rate environment

Since they’re short-term, cash-equivalents react quickly to changes in interest rates.

When interest rates are rising, cash equivalents are one of the best ways to take advantage of the rate increases without risking the loss of principal that comes with bonds in a rising rate market.

Complete liquidity in a financial emergency

Cash equivalents are made-to-order for emergency funds.

Should you be hit with a large unexpected expense, or suffer a temporary loss of income, cash equivalents will be readily available to cover the expense or the income shortfall.

Can be used to purchase an investment on short notice

This is one of the major reasons for maintaining at least a small cash position in your investment portfolio at all times.

If your portfolio is 100% invested in stocks, bonds, and other securities, the only way to take advantage of new investments will be to liquidate existing positions.

Having cash-equivalents eliminates this complication, and ensures you’ll always have liquid funds available to take advantage of new investment opportunities.

The four reasons above are exactly why everyone needs to have at least some money sitting in cash-equivalent accounts.

How to Buy Cash-Equivalent Investments

How and where you’ll buy cash-equivalent investments will depend on the specific security you’re looking to purchase.

The most common sources include the following:


Banks are where you can invest in savings accounts, money market accounts, and certificates of deposit.

The advantage is that you can invest in any of these securities through banks without needing to pay commissions.

However certain accounts with some banks do involve monthly fees with savings accounts and money markets unless you maintain a certain minimum average balance.

Local banks are notorious for paying very low interest rates on savings, money markets and CDs.

But there are online banks that pay much higher interest. And since most consumers take advantage of online and mobile banking today, an online bank may be the only bank you’ll need.

Investment brokers

Investment brokers offer the widest variety of cash-equivalent investments.

That includes short-term bonds, U.S. Treasury securities, and even CDs.

The best online brokers will offer the widest variety of cash-equivalent investments, as well as all other types of securities.

However, unlike banks, investment brokers typically charge commissions or some sort of transaction fee when you invest in many cash-equivalent securities.

This is especially true in the case of short-term bonds and short-term bond funds. They may also charge small fees on CDs, and occasionally on Treasury securities as well.


TreasuryDirect is where you can purchase, hold and sell US Treasury bills and longer-term US government securities. There are no transaction fees involved, nor is there a monthly account fee.

TreasuryDirect is best used when you plan to hold your cash equivalents for an extended period of time.

The disadvantage is:

If you need funds from the account on short notice, you’ll need to transfer them into a bank or brokerage account.

Tax Consequences

Unless you’re holding your money in municipal bonds, which are not generally cash-equivalents, the interest you earn on your cash-equivalent investments will be taxable at either the federal or state level, or both.

The exception:

The investments are held in a tax-sheltered investment account, like a 401(k) plan or an IRA.

But if you have a taxable bank or brokerage account, or even if you hold Treasury securities through TreasuryDirect, the interest income will be taxable.

The income will be reported to you and to the IRS on IRS Form 1099-INT, and it will generally be subject to ordinary income tax rates.

One tax consequence you generally don’t need to worry about with cash-equivalent accounts is reporting capital gains.

Since cash-equivalents are interest-bearing and short-term, price fluctuations are either extremely minor or totally nonexistent.

However, if for some reason you do receive capital gains from cash-equivalent investments, you will need to report those on your income tax return as well.


One of the reasons why investors either keep only a very small amount of their portfolios in cash-equivalents, or hold none at all, is because of the admittedly low interest rate returns.

After all, an interest rate of just a fraction of 1% is practically no return at all.

But return on investments is not the most important reason for holding cash-equivalents.

As discussed earlier, the primary reasons are capital preservation, riding out a rising interest rate environment, and providing liquidity to cover emergencies or taking advantage of new investment opportunities.

When seen in that light, interest rate return – though desirable – isn’t the main reason to hold cash-equivalents.

Even with no interest rate return at all, cash-equivalents are absolutely necessary in every portfolio and personal financial plan.