Rich people typically keep their "cash" not in physical currency, but in highly liquid financial instruments known as cash equivalents, which offer both safety and the potential for modest returns.
Beyond the Mattress: The Wealthy's Approach to Cash
While everyone needs some immediate cash for daily expenses, the wealthy approach their larger sums of liquid capital strategically. Instead of letting large amounts sit idle in a standard checking account, they opt for solutions that maintain liquidity while offering security and some growth. This sophisticated approach ensures their money is readily accessible but also working for them, even if minimally, within their broader financial strategy.
Key Places Rich People Keep Their Liquid Funds
1. High-Yield Savings Accounts and Money Market Accounts
For immediately accessible funds that still earn more than a traditional checking account, high-yield savings accounts are a common choice. Money market accounts, often offered by banks and credit unions, blend features of savings and checking accounts, providing competitive interest rates along with limited check-writing privileges. These accounts are generally FDIC-insured up to permissible limits, offering a high degree of safety.
2. Cash Equivalents: The Millionaire's Go-To
The primary destination for a significant portion of a wealthy individual's liquid assets is in cash equivalents. These are financial instruments that are almost as liquid as physical cash but offer better security and/or returns. They are popular investments for millionaires due to their stability, low risk, and ease of conversion to cash.
Here's a closer look at common cash equivalents used by the affluent:
- Money Market Mutual Funds: Different from bank money market accounts, these are mutual funds that invest in highly liquid, short-term debt instruments like commercial paper, certificates of deposit, and Treasury bills. They offer slightly higher returns than traditional savings accounts while maintaining high liquidity, though they are not FDIC-insured. Learn more about money market mutual funds.
- Certificates of Deposit (CDs): CDs are time deposits offered by banks that pay a fixed interest rate for a specified term (e.g., 3 months, 1 year, 5 years). While less liquid than a standard savings account due to early withdrawal penalties, they offer guaranteed returns and are FDIC-insured, making them attractive for funds not needed immediately.
- Commercial Paper: This is a short-term, unsecured promissory note issued by corporations, typically to finance short-term liabilities. It's often issued at a discount, with the return being the difference between the purchase price and the face value. It's an option for very short-term, large-scale lending. Find out more about commercial paper.
- Treasury Bills (T-Bills): Issued by the U.S. Department of the Treasury, T-bills are short-term debt securities with maturities of a year or less. They are considered among the safest investments in the world because they are backed by the full faith and credit of the U.S. government. Many millionaires specifically keep their cash in Treasury bills due to their unparalleled safety and high liquidity.
Comparing Cash Equivalent Options
To illustrate the differences, here's a brief comparison:
| Cash Equivalent | Liquidity | Typical Return | Risk Level |
|---|---|---|---|
| High-Yield Savings Accounts | Very High | Low | Very Low (FDIC-insured) |
| Money Market Mutual Funds | High | Low to Moderate | Low (not FDIC-insured, but highly diversified) |
| Certificates of Deposit (CDs) | Moderate (term-based) | Low to Moderate | Very Low (FDIC-insured) |
| Commercial Paper | High (short-term) | Moderate | Low to Moderate (corporate-specific) |
| Treasury Bills | Very High | Low | Very Low (backed by US Govt) |
Note: Returns and risk levels are relative and can fluctuate with market conditions.
Strategic Allocation of Liquid Assets
For wealthy individuals, managing "cash" is part of a broader asset allocation strategy. They don't just stash money; they strategically place it in instruments that align with their short-term financial needs, emergency funds, and opportunities for capital deployment, all while prioritizing capital preservation. This nuanced approach ensures their liquidity serves their overall financial goals without being exposed to unnecessary risk.
