How and where to invest your cash
Investors compare different cash investment options.

SmartAsset and Yahoo Finance LLC may earn commission or revenue from the links below.

If you're starting to invest or refine your strategy, there are many options available based on your financial goals, risk tolerance, and investment timeline. Common investments range from the safety of traditional savings accounts and certificates of deposit to riskier stocks, bonds and mutual funds. Each investment has specific advantages and disadvantages. Therefore, diversifying your portfolio with these options can reduce risk and potentially increase your returns.

If you need help deciding to invest, financial advisor Can work with you to analyze options and manage risk in your portfolio.

When choosing how to invest cash, consider your financial goals, risk tolerance, and liquidity needs. Savings accounts facilitate safe and quick withdrawal of funds. CDs can offer higher returns if you're willing to lock up your money for a specified period of time. Money market funds strike a balance between yield and convenience of funding. Cash management accounts give you convenience and flexibility, while short-term bonds offer higher returns and lower risk. Here's a more in-depth breakdown of each.

Savings accounts are considered a safe option for investing cash. These accounts, available through banks and credit unions, allow you to keep your funds available while earning interest. Although interest rates on savings accounts are typically lower than other investments, they offer high liquidity, meaning you can withdraw your funds at any time without facing penalties.

Additionally, savings accounts are less risky because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. This makes them an excellent choice for anyone looking to protect an emergency fund or save for short-term financial goals.

A Certificate of Deposit (CD) is a time deposit offered by a bank that pays a fixed interest rate for a specified period of time. The term can vary from a few months to a few years. In exchange for agreeing to deposit money into the account for a term, you'll typically receive a higher interest rate than a regular savings account.

However, you should be aware that there are often penalties for withdrawing funds before a CD matures. CDs are also FDIC insured, providing a safe investment. They are ideal for investors who don't need immediate access to cash and want predictable returns over a fixed period.

A money market fund is a mutual fund that invests in short-term, high-quality debt securities such as Treasury bills and commercial paper. These funds are designed to provide higher yields than traditional savings accounts while maintaining a high degree of liquidity.

Although not insured by the Federal Deposit Insurance Corporation (FDIC), money market funds are generally considered low-risk because they invest in stable, short-term instruments. They are managed by professional fund managers who strive to maintain the fund's net asset value (NAV) at $1 per share. For investors looking for slightly higher returns on cash while still prioritizing safety and liquidity, money market funds may be a suitable choice.

Please note: Don't confuse money market funds with money market accounts (MMA). An MMA is a deposit account that combines the features of a checking and savings account. They typically don't earn as much as money market funds, and they are offered by banks and credit unions rather than brokerage firms.

A Cash Management Account (CMA) combines the functions of a savings account, checking account, and investment account into one product. CMAs are offered by financial institutions and investment companies and offer higher interest rates on deposits than traditional savings accounts. They can also easily access your funds via check, debit card, and electronic transfer.

CMAs are not always insured by the FDIC, but many are protected by the Securities Investor Protection Corporation (SIPC), subject to certain limits. These accounts are ideal for individuals who want the convenience of managing their cash while earning competitive interest rates and maintaining flexibility in how they use their funds.

Short-term bonds are debt securities that mature in one to three years. They can be issued by governments, municipalities or companies. These bonds typically offer higher yields than savings accounts or certificates of deposit, but are slightly riskier. The principal is repaid when due, and interest is usually paid semiannually.

Short-term bonds issued by governments, such as Treasuries, are considered very safe, while corporate short-term bonds may carry greater risk but may provide higher returns. Short-term bonds may be a good option for investors who want to earn more interest than a savings account while still preserving capital in a relatively short period of time.

An investor is considering different options for managing his cash investments.
An investor is considering different options for managing his cash investments.

Here are four general factors to keep in mind when deciding how to invest your cash:

An investor is reviewing her cash investments.
An investor is reviewing her cash investments.

Knowing how to invest cash effectively is key to securing your financial future. Cash investments such as savings accounts, money market funds, and short-term bonds may not yield as high returns as other options, but they are important for reducing risk and building capital. By diversifying your cash investments among these options, you can achieve a good balance between risk and reward. Keeping up with changing interest rates and requirements, as well as different financial trends, will also help you choose where to put your cash to maximize your opportunities.

Image source: ©iStock.com/damircudic, ©iStock.com/Srdjanns74, ©iStock.com/Goodboy Picture Company

The post How and Where to Invest Your Cash appeared first on SmartReads by SmartAsset.