In the previous chapter, we suggested you keep three to six months of expenses in cash for emergencies. Like many women, you might have even more in cash than you need for this purpose. Perhaps you're saving for a major capital expense, like buying a house or starting a business. Or maybe you just feel better with a larger cushion. Whatever your reason, you might want to consider putting your excess money into cash alternatives, which are relatively low-risk, short-term investments that provide a higher return than savings and checking accounts.
Let's say you wanted a one-year emergency fund. You could set aside the amount you need to cover several months of expenses in a savings account and put the remainder in cash alternatives that have a term of three to 12 months. The beauty of this approach is if you need that extra cash, it will be ready for you before your emergency cushion runs out, and it could be earning higher interest than if you had left it in your savings account.
I'm a perfect example of the situation in which many women find themselves. I, too, had more money than I needed in cash. In my case, it was because I was trying to figure out where to invest my assets. Since I didn't have the time to think about it, significant sums sat in cash accounts. When I asked my financial advisor about values-aligned alternatives to my current savings accounts, I was told not to worry, because it was just cash and it didn't need to be values-aligned. But there were meaningful balances in those accounts, and that answer wasn't good enough for me. I knew there had to be something better. So I did my homework and found several values-aligned, more lucrative cash alternative investments—and I moved my money. And you can, too.
In this book, cash alternatives are defined as investments that are relatively low-risk and provide short-term liquidity, which means you have access to the capital within months from the time it was invested. Interest paid is usually a bit higher than you would receive for a cash account. Some of the investments described in this chapter are FDIC insured, while others are not.
There are three primary differences between cash and cash alternatives:
You can purchase cash alternatives at values-aligned banks and financial institutions as well as through some financial product innovators.
Federally regulated banks and financial institutions offer money market deposit accounts and certificates of deposit (CDs). These investments can provide values-alignment as well as high levels of liquidity and security. As long as they're held at federally regulated financial institutions, these assets are insurable up to $250,000.
To be fully insured, the total value of all the accounts that you hold with a single financial institution cannot add up to more than $250,000. Anything over that amount is not covered. If you have more than $250,000 in cash and cash alternatives, there are several ways to safeguard your money. First, you could simply move some of your assets to another bank, as long as it isn't a subsidiary of your current financial institution. Second, you could open accounts at your bank in different categories, each of which has its own $250,000 limit. These categories include single accounts, joint accounts, retirement accounts, and trusts.
To avoid the hassle of these options, you could also try a third option. Insured Cash Sweep (ICS) and Certificate of Deposit Account Registry Service (CDARS) are structures that allow large depositors to conveniently protect all their assets. Depositors maintain a relationship with only one bank, but their assets are split across a number of financial institutions, which enables you to receive the benefit of full insurance without the hassle. CNote, which will be described shortly, partners with CDFIs to offer an alternative to ICS and CDARS.
Money market deposit accounts are a cross between a savings and a checking account. They are highly liquid, so you can withdraw your cash immediately or within a few days, depending on the terms set by your lending institution. As is the case with savings and checking accounts, the interest rates offered by your bank will depend on the rate set by the Federal Reserve System (Fed)* and vary over time. Depending on conditions, these accounts could return anything from slightly more to significantly more than savings accounts.
In 2019 I was receiving 1.91% interest on the money market deposit account I had at one of my financial institutions. That was almost 1.8% higher than what I was getting for my savings account at a different bank. A little over a year later, after the Fed cut interest rates multiple times in response to global economic conditions and the COVID pandemic, the return on my money market deposit account fell to 0.27%. This rate was much closer to the interest I was receiving on my savings account.
When you invest in a money market deposit account, your financial institution uses those assets for the same purposes that apply to your other cash deposits. So you can employ the same criteria you use in finding a values-aligned bank to determine where to open a money market deposit account.
CDs are time-bound cash deposits. These investments are made for a fixed term, and they pay a fixed interest rate during that time. CDs are available from banks, credit unions, and CDFIs. Funds in CDs are invested by the financial institution in the same way the money in any of their deposit accounts is used. Many values-driven financial institutions offer CDs. Some even offer green, sustainable, or other thematic options.
CDs are available in multi-month and multi-year durations. Terms from three months to five years are most common, although there are CDs with shorter and longer durations. It pays to shop around, as interest rates vary depending on the term of the CD and the financial institution selling the investment.
Investments described in this section are not federally insured, there are limitations that can restrict liquidity, and they carry more risk. One way to assess risk is to understand the track record of the company and product in which you are investing. Unless you are comfortable with these factors, be thoughtful about how much of your cash you place in any of these investments.
Money market funds are often confused with money market deposit accounts. But these are two distinctly different financial products, as shown in Table 5.1.
TABLE 5.1 Money Market Deposit Accounts vs. Money Market Mutual Funds
|Money Market Deposit Account||Money Market Mutual Fund|
|Federally insured||Yes, up to $250,000||No|
|Liquidity||Immediate to a few days||Immediate to a few days|
|Principal at risk||No||Yes, although rare|
|How funds are used||By your financial institution to support its business mission||Invested in liquid cash securities with high credit ratings|
|Values-aligned||Based on bank's mission and values||Can be more difficult to determine|
|Return||Higher than savings account, linked to federal rate||Higher than money market deposit accounts|
Money market mutual funds are usually acquired through an investment firm,* although they can sometimes be purchased through banks and even some values-aligned financial institutions such as credit unions. Assets in a money market mutual fund are invested in cash and cash alternatives that have high credit ratings. This makes them relatively liquid and relatively safe. However, you have limited visibility to the holdings within these funds, which can make it more difficult to tell whether the investments they hold are values-aligned.
Unlike money market deposit accounts, these investments are not insured, and you could lose money that is invested in them, although this rarely happens.1 Because of this increased risk, returns on money market mutual funds tend to be higher than those on money market deposit accounts.
The Community Investment Note is a product of Calvert Impact Capital, one of the oldest and most recognized names in the social investing space. Calvert Impact Capital was established as a nonprofit in 1995 to provide investors with more ways to support communities in the US and around the world. The Note's funds are used to finance affordable housing, community development, small business, and other sustainability goals.
You can invest in the Community Investment Note online for as little as $20, or through an investment firm with a $1,000 minimum. The Note has a perfect track record of repayment and a one-year rate of 0.50%. Since rates, terms, and other conditions change over time, please reference Calvert Impact Capital's website for up-to-date offerings and impact metrics.
The Social Investment Fund is an offering of RSF Social Finance, a nonprofit that was founded in 1936. RSF was minimally active until its revitalization in 1984, when the organization began to dedicate itself to making loans to advance social enterprises working in food, agriculture, education, and the environment. Close to 45% of the loans in RSF's portfolio went to enterprises that were founded, or led, by women.
To date, RSF has had a perfect repayment rate, having returned 100% of all principal and interest to investors. RSF's Social Investment Fund has a $1,000 minimum, 90-day term, and has historically paid interest rates of 0.5% to 1.25%. Unlike most financial institutions that base their interest payments on the Fed's rate, RSF uses the combined wisdom of its borrowers and investors to set rates that are a win-win for all members of the community.
In the previous chapter, we covered two types of CDFIs—banks and credit unions. A third type is the CDFI Loan Fund. These regulated financial institutions do not take deposits. Instead, they focus on providing low-interest loans and technical assistance for small businesses, housing, and community development in economically distressed locations.
Many of these organizations, which can be found all over the country, have maintained 100% repayment rates throughout their history. Minimum investment amounts can range from $1,000 to $250,000, while terms are usually 1 to 10 years in duration. Investors receive a modest, fixed rate of return that's determined by prevailing interest rates and the term of the investment. There can be a requirement that investors are accredited, and returns can be below market rate. If you consider investing significant amounts of capital this way, you might want to diversify across several loan funds.
CNote offers investors a way to diversify across multiple CDFIs with one investment. This innovative finance company was founded by Cat Berman and Yuliya Tarasava, two women who wanted to do something powerful and influential in the world of finance. They chose to start with cash because it's an overlooked asset class and they realized they could use it to help close the wealth gap in the United States. Both women come from immigrant families and believe that talent is universal, but opportunity is not. CNote allows any investor to achieve a greater financial and social return on their excess cash. Many of the loan recipients are women and minorities.
FLAGSHIP FUND CNote's first product, the Flagship Fund, was launched in 2016. The investment is available to anyone for as little as $5. There are no fees. As of this writing, the Flagship Fund offers a 2.75% return with 90-day liquidity. There are a few conditions. First, the rate is not fixed and can vary. Second, liquidity is at management's discretion and dependent on the amount invested.
Here's how it works. CNote provides wholesale, or inexpensive capital, to highly vetted CDFIs, which then lend money to support their local communities. The CDFIs pay CNote an interest rate on the money they borrow. CNote then pays its investors their return based on the rate paid by the CDFIs.
To ensure investors are repaid, CNote has implemented several strategies to mitigate potential loss. First, CNote carefully vets its partners to ensure they have a strong repayment track record. CNote claims that not one of their partners has ever lost a single investor dollar—ever. Second, investments in CNote have exposure to more than 50 CDFIs across 37 states. And third, CNote has set aside a portion of its deposits as cash reserves to serve as a guarantee against loss.
CNote's Flagship Fund provides attractive returns for amounts up to $20,000 that you want to safeguard for three months and up to $80,000 for funds you want to invest for up to one year. Of course, you can invest larger sums. If you do that and think you'll need the money, please be sure you fully understand the liquidity implications.
PROMISE ACCOUNT The Promise Account is a fully insured cash alternative that allows investors with more than $250,000 to distribute their capital across prequalified FDIC and NCUA insured CDFIs across the country. This account functions similarly to ICS and CDARS. Investors can deposit and insure up to $10 million through the Promise Account, while knowing that 100% of their cash is going to address housing, transportation, and other critical needs in low-income communities. There is a single dashboard that helps investors monitor their cash and its impact. Liquidity and returns are flexible.
Worthy Bonds are a product of Worthy Peer Capital, a financial services company that launched in 2016 to provide a new type of investment vehicle. Sally Outlaw, the woman behind this business, wants the average non-accredited investor to have an opportunity to invest in private companies that are growing and providing high-yield returns. Until recently, these types of investments were only available to accredited investors and required minimums that started at $25,000.
Worthy Bonds are sold in $10 increments and pay 5% interest annually. An investor can purchase up to $100,000 of Worthy Bonds. These bonds are highly liquid, which means bondholders can withdraw all their capital with just a few days' notice and pay no fees or penalties. The bonds can be purchased online or through the Worthy app. By linking your debit or credit card to the app, you can choose to round up spare change from your daily purchases. Your extra cents are tracked, and once $10 has been accumulated, another bond is automatically purchased for your portfolio. Worthy is integrated into Mint and Dwolla, two popular FinTech companies that provide additional points of entry to this financial product.
Worthy lends the capital it raises through its bonds to small businesses. Each loan is secured by inventory, which means the companies that get loans from Worthy have tangible assets that can be sold in the case of delinquency. When you invest in Worthy bonds, your money is spread across multiple loans to diversify your holdings and minimize risk. Worthy also keeps assets in reserve to repay investors that seek redemptions or asset returns.
There are a number of values-aligned cash alternatives you can consider for your extra cash. They span from fully insured to higher risk solutions. Worthy Bonds' offering is the newest and least tested option, which makes it the highest risk solution described in this chapter. Some suggest that the increased risk makes this investment inappropriate as a cash alternative. However, the very low entry level, high liquidity, and 5% return potential could appeal to investors with a higher risk tolerance. Be sure to do your research on this, or any, financial product before you invest.
Table 5.2 compares minimums, terms, and expected returns for the products described in this chapter.
TABLE 5.2 Cash Alternative Product Comparison
|Money market account||Yes, up to $250,000||All||$0 to $100 common||Usually 1 day||Variable, tied to Fed rate|
|Certificate of deposit||Yes, up to $250,000||All||Variable, some $0||Variable, 30 days to 10 years||Variable, tied to Fed rate|
|Calvert Note||No||All||$20.00||Variable, 1 to 15 years||0.5%–3.5%|
|RSF Fund||No||All||$1,000||90 days||0.5%–1.25%|
|CDFI Loan Fund||No||Accredited investors||Variable, $1,000 and up||Variable, 1 to 10 years||0.5%–3.0%|
|CNote Flagship Fund||No||All||$1.00||90 days per $20,000||2.75%|
|CNote Promise Acct||Yes, up to $10 million||Accredited investors||$250,000||Flexible||Variable|
|Worthy Bonds||No||All||$10.00||2–3 days||5.00%|
Assuming you have more cash than you need for emergencies, consider trying one of the options listed in Table 5.2. You can start small and increase your investment over time if that feels better to you. That's what I did with CNote. I initially invested $5,000 with the company; then after six months I felt confident enough to increase my investment severalfold.
Regardless of the investment, be sure to do your homework first. As you consider your options, please remember to verify the status of term restrictions, automatic rollovers, and limits on withdrawal sizes before you buy. This will help prevent any surprises when you're ready to withdraw your capital.