Having access to cash is essential. Almost everyone needs an emergency fund, and most financial advisors recommend keeping between three to six months’ worth of expenses in a savings account or similar. If you have a significant purchase coming up, you should also have some cash waiting for that. In my opinion, money that you expect to need within the next five years should not be invested in volatile assets like stocks and should remain in cash or near-cash equivalents.

But wait – isn’t cash a terrible asset? Doesn’t it lose value over time due to inflation? After all, the value of money declines as inflation increases, so why would anyone want to hold cash?

Well, here’s an interesting thing: Warren Buffett is currently sitting on over $300 billion in cash, and he’s not worried. The reason why someone like Buffett holds so much cash is liquidity – the ability to turn an asset into cash quickly with little or no loss in value. Liquidity is defined as “the ease with which an asset can be converted into cash or a cash-equivalent without affecting its market price.”

Why is liquidity important? Well, you might need cash for an emergency, to make a quick purchase, or even to capitalize on a flash sale on stocks (or other investment opportunities).

So, while cash may lose value due to inflation, it still serves an important role in providing flexibility, access to opportunities, and peace of mind during uncertain times. The challenge, though, is balancing the need for liquidity with the desire to protect your money from inflation.

How to Keep Cash Liquid and Still Earn a Return

You don’t have to let your money just sit in a low-interest savings account or under your mattress. There are several options that allow you to maintain liquidity while earning a return far greater than what you’d get in a typical bank savings account.

1. Certificates of Deposit (CDs)
A Certificate of Deposit is a fixed-term deposit offered by banks and credit unions that pays a higher interest rate than a regular savings account. The trade-off, however, is that your money is locked up for the term of the CD (usually between six months and five years), and if you withdraw the funds before maturity, you could face a penalty.

The return on a CD generally aligns with the federal funds rate, so it could be an attractive option if you’re willing to lock your funds for a set period. However, they aren’t as liquid as I’d like for something like an emergency fund. I don’t own CDs, nor do I recommend them, but in the interest of education, here you go.

2. High-Yield Savings Accounts (HYSA)
If you’re looking for liquidity combined with a competitive return, a high-yield savings account (HYSA) is a great option. You can find these accounts mainly at online banks, which are able to offer higher rates because they don’t have the overhead costs of physical branches.
Some examples of high-yield savings accounts include:

• Ally Bank
• Marcus by Goldman Sachs
• Synchrony Bank

These accounts offer liquidity similar to a standard savings account but with a much better return, usually far exceeding what traditional brick-and-mortar banks offer. In fact, some high-yield savings accounts are currently offering returns in the range of 4-5% annually. I had my money with Marcus for years, before discovering the third option.

3. Brokerage Settlement Funds (What I do)
A settlement fund is where uninvested cash in your brokerage account sits before you invest it, or after you sell an asset like a stock. It’s essentially a money market account, which is a type of savings vehicle that’s invested in short-term, low-risk securities.

The beauty of this option is that it combines liquidity with a higher return than a savings account, and you can keep this with all your other investments. Right now, in March 2025, my settlement fund is earning about 4.22% annually, but keep in mind, this rate fluctuates weekly. For example, Vanguard’s settlement fund ticker is VMFXX, and Fidelity’s is SPAXX. You’ll notice that most settlement fund tickers end in “XX” – that’s typical for these funds.

These funds are very liquid, so you can access your cash without penalty, and they offer returns that are often comparable to or better than high-yield savings accounts and CDs.

Is there any risk? Yes, but it’s minimal. Fund prices can sometimes go down if interest rates spike or during an economic crisis, but in general, I consider these similar to a high yield savings account.

Why I Moved My Savings to a Settlement Fund
Over the past year, I moved all my savings and my emergency fund into the settlement fund of my brokerage account. The reason? It gives me the flexibility of cash, while also earning a return that outpaces inflation. Not only that, but if the market presents an opportunity, I can quickly invest the money in a stock or fund, giving me the potential for even greater returns. It’s also nice to have everything in one place.

Conclusion

Cash is far from being a bad investment; it’s just a matter of how you manage it. While inflation erodes its value over time, maintaining a portion of your assets in liquid, low-risk vehicles can still provide peace of mind and access to opportunities. You don’t have to let your cash lose value – you can store it in options that offer a decent return without compromising liquidity.