By Lori Ioannou

Cash or cash equivalents should range from 2% to 10% of one's portfolio as a guideline but can vary widely depending on individual needs, financial advisers say. But where should you put it to balance liquidity and returns?

"When mapping out a cash strategy, remember there are trade-offs," says Alvin Carlos, a certified financial planner in Washington, D.C. "There is an opportunity cost for having too much cash sitting on the sidelines and not invested in other assets including stocks."

Yet that doesn't mean you need to accept next to nothing for your cash. While the era of getting yields of "5% or more on these cash products is over," says Angelo Kourkafas, senior global investment strategist at Edward Jones, there are still options for solid yields if you shop around.

Here are some popular options for cash alternatives -- products that are about as liquid as cash and can earn you some money.

High-yield savings accounts

One good place to park cash is in a high-yield savings account, financial advisers say. There is robust competition among bricks-and-mortar banks, online banks and other financial institutions to offer deals to attract customers.

The highest yield on a high-yield savings account in January was 4.75%, down from 5.35% the same time last year, according to Bankrate. The top rates were offered by online banks, says Ted Rossman, senior industry analyst at Bankrate, with a 4.75% rate at Quontic Bank and 4.55% rate at BrioDirect.

These accounts are federally insured up to $250,000 per bank, per depositor and account type so you can have multiple accounts at different institutions and get FDIC coverage, and they are a good option if you need access to cash on a regular basis. Many offer access to automated-teller machines, and some allow you to link to checking and other external accounts. Be sure to read the fine print so you know all the product features.

There are also downsides to be aware of, advisers say. For one, the yield on these accounts can fluctuate, since they often move in tandem with the short-term interest rates set by the Federal Reserve. And some are tiered so that only part of your balance -- say, on the first $500, $1,000 or $10,000 -- gets the top rate and then drops after that.

What's more, some accounts require a minimum balance and have limits on withdrawals monthly. Falling short of the minimum balance may trigger higher monthly maintenance fees.

CDs

Certificates of deposit are a good savings tool if you want to set savings goals for the future. They are offered by traditional banks, online banks, credit unions and other financial institutions. Unlike high-yield savings accounts, the rate you receive remains the same throughout the term.

According to Bankrate, the top yields as of Jan. 30 were 4.45% on a six-month CD from Popular Direct and Bask Bank, and 4.40% on a one-year CD from Live Oak Bank. Or you can get 4.35% on a three-year CD from Merrick Bank and 4.30% on a five-year CD from KS StateBank.

There are so-called jumbo CDs that offer high rates with a minimum balance of $100,000, such as a one-year CD from Suncoast Credit Union with a 4.20% annual percentage yield or a five-year CD from GTE Financial with a 4.33% annual yield.

Keep in mind that CDs often require minimum deposits and lengthier terms than other cash-equivalent investments.

There also are often penalties if you withdraw the money early and need to close the CD. These penalty rates can offset any interest earned, says Kevin Mayo, managing director at Falcon Wealth Planning.

Many financial advisers suggest using a ladder approach when investing in CDs. This strategy involves buying CDs with staggered maturities while keeping some funds accessible in the short term.

The mechanics of setting one up is simple, and you can set them up with any time horizon you choose. If you had $40,000 to invest, you could divide the funds equally into four CDs with maturity dates of three, six, nine and 12 months. As each matures you can cash out if interest rates are falling, or you can continue to reinvest in new CDs if yields are favorable.

Another popular option, says Carlos, is a brokered CD, which is issued by a bank but sold through a broker or brokerage firm. Many of these products offer higher yields and longer terms than traditional bank CDs. There is a secondary market for them, too, so investors can sell them before the term is up, if needed, to avoid paying a penalty for early withdrawa l.

But keep in mind some brokered CDs can be called back by the issuing bank before the maturity date, which means you will lose out on the full earnings potential you expected. This is most likely to happen when interest rates drop.

Money-market funds

These funds -- which are different from the money-market savings accounts offered by banks -- invest in short-term debt instruments issued by government and corporations such as U.S. Treasury bills and commercial paper and are considered "cash equivalents," offering investors liquidity with low levels of risk.

They work like a typical mutual fund and issue redeemable units or shares to investors. "But a key difference is that these funds aim to maintain a net asset value of $1 a share, and earnings generated through interest on portfolio holdings are distributed to investors in the form of dividends," says Peter Crane, president of Crane Data.

When assessing these funds, advisers suggest looking at the seven-day "SEC yield," which is annualized and net of fees and is the standard measure of performance for money funds. Also check if the fund is taxable or tax-exempt, which depends on the type of securities the fund invests in.

The average yield on the largest taxable money-market funds as of Jan. 29 was 3.77%, according to Morningstar Direct, but there are higher rates on various products. For example, Pimco Government Money Market Fund (AMAXX), a taxable $2.33 billion fund that requires a minimum investment of $1,000, has a 7-day yield of 4.12% and an expense ratio of 0.33%.

Lori Ioannou is a writer in New York. She can be reached at reports@wsj.com.

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February 06, 2025 10:00 ET (15:00 GMT)

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