Most of us think of the money we carry in our wallets as cash, and that’s it. Cash, though, has a broader definition than just the coins and bills we use to pay for goods. It is also the type of investment characterized by a high level of liquidity and little to no risk to your original investment.

Generally, cash investments are short-term, interest-bearing securities that offer investors the opportunity to collect a specified interest rate, keep a high level of security and maintain liquidity with their money. The most commonly used cash investments are bank savings accounts, certificates of deposits (CDs), and money market funds. Some employer-sponsored retirement plans may offer guaranteed investment contracts, which are another form of cash investments. Cash investments are best used for emergency funds. This is money you want to have some return on, but if you needed it, you could have it in hand very quickly. This may also be money that you would like to invest in the near future, but haven’t quite decided which investments are right for you. Because these investments are highly liquid, they tend to offer lower returns than other investments might. Most of these investments also don’t have any surrender charges for withdrawing the money.

The Federal Deposit Insurance Corporation insures passbook accounts, money market deposit accounts, and CDs that are issued by its member banks and savings and loan institutions up to a maximum of $100,000. For cash investments offered by credit unions, there is a federal deposit insurance agency that differs from the FDIC. Any interest earned on savings accounts or money market deposit accounts is fully taxable for federal income tax purposes.

Savings Accounts

Savings accounts, or passbook accounts, are found at any bank, credit union, or savings and loan institution. Because they are extremely liquid, they are characterized as having extremely low interest rates. Passbook accounts also tend not to have check-writing privileges. Most banks also offer interest-bearing checking accounts. However, the interest on these accounts tends to be less than that on savings accounts and there may be quite high minimum balances required in order to qualify to receive interest. Any interest received on either a savings account or a checking account is taxed as ordinary income.

Money Market Deposit Accounts

Money market deposit accounts, which differ from money market mutual funds, typically offer a higher rate of interest than a savings account would. However, there is usually a minimum deposit, and the institution may charge a fee if your balance falls below the required minimum. Money market deposit accounts are federally insured, while money market mutual funds are not. The interest rates for these accounts tend to be less than they would be on other, longer-term, less liquid accounts, such as CDs. There is typically no surrender charge for withdrawing your money. Interest received on these accounts is taxed as ordinary income.

Money Market Mutual Funds

These are among the most popular types of investments today. Money market funds invest in Treasury bills, jumbo CDs (CDs that have a certain minimum amount, such as $100,000), commercial paper, and other short-term, interest-bearing securities. The securities held by money market funds tend to have a maturity between 30 and 90 days. Generally, the interest earned on money market funds is greater than that earned on savings and money market deposit accounts.

Some money market funds hold short-term municipal securities, which would entitle the money market fund investor to tax-exempt interest. Both taxable and tax-exempt funds usually offer check writing and telephone-transfer (to another fund within the same fund family) privileges.

Money market funds may be offered through stock brokerage firms and mutual fund companies. Neither the Federal Deposit Insurance Corporation nor any other government agency guarantees an investment in a money market fund.

Certificates of Deposit

CDs are deposits made to a bank or savings and loan institution for a specific period of time, usually a minimum of three to six months all the way up to 10 years. They are insured by the FDIC and offer a fixed rate of return and fixed principal value. While these are cash investments, they aren’t as liquid as a savings account or a money market fund. Because of that, they are known to pay a higher interest rate. Typically, CDs offer tiered interest rates: the more money you put in, the higher the interest rate will be. This also works for how- ever long you invest your money. Generally, the longer your money is in a CD, the better an interest rate you will receive. You may also be able to purchase CDs that have variable interest rates. Since your money will be tied up for a specified time period, there may be a surrender charge for redeeming the CD early.

Banks, credit unions, and savings and loan institutions aren’t the only place to purchase CDs. This will help if you decide you want to invest in one because you can shop around for the best interest rate. Many stock brokerage houses sell CDs that were issued by banks or credit unions. Through brokered CDs, you may have access to a secondary market for your CD, which could negate the possible surrender charge. They may also offer slightly higher interest rates. Because you lock in your interest rate when you initially invest your money in a CD, you may be subject to interest rate risk. When the interest rate begins to rise, the corresponding rates on CDs will also rise. By locking in your rate earlier, you will be earning less than if you were earning the current rate. Plus, you wouldn’t be able to pull your money out to reinvest at a higher rate without incurring some type of early withdrawal penalty. Interest paid on CDs is fully taxable for federal and state income taxes. However, the surrender penalty may be deductible from your gross income for tax purposes. There are also market-linked CDs, which are tied to an equity index, like the S&P 500 stock index. These CDs have an FDICguaranteed principal, but their return is based on the market’s actions, provided that the investor has held the CD until maturity. For example, if you purchased a market-linked CD (MLD) for $5000 and the applicable market index increased, at maturity you would receive your principal of $5000 plus a return based on the index’s appreciation. However, should the market go down, you wouldn’t receive any return on your money. You would simply receive your original investment of $5000 back. If you were to redeem or sell the MLD prior to maturity, chances are you wouldn’t receive 100 percent of your principal.

For tax purposes, the gain on the investment is taxed annually as ordinary income even though the investor sees no current interest income from the MLD. This is why MLDs are usually held in taxqualified plans.

Commercial Paper

Commercial paper securities are short-term promissory notes issued time to time by major corporations. They typically have maturities from 30 to 270 days, and fairly high minimum amounts like $10,000. The only asset securing these investments is the financial strength of the issuing company. Historically, this has been quite good. Commercial paper may be purchased through broker/dealers and commercial banks. These are considered money market investments because they are shorter-term, high quality securities. Most often, commercial paper is purchased by money market mutual funds and other lenders that are interested in short-term, liquid investments. The interest and any gain on commercial paper are fully taxable.

Guaranteed Investment Contracts

Within many employer-sponsored retirement accounts, such as 401(k)s, guaranteed investment contracts (GICs) are an option. GICs are fixed-interest-bearing contracts generally issued by insurance companies. Since they are purchased through retirement plans, they are, in essence, a contract between the employer and the issuing company. The issuing company accepts funds for investment for a specific period of time during which the money will earn a guaranteed interest rate or rates, and guarantees both the GIC’s principal and interest for the specified time period. The participating employee may then elect to invest all or some of their money in the plan’s fixedinterest account, to the extent that the plan allows. It’s through the GIC that the plan provides for the fixed-interest account. The employee’s money may stay in this account for as long as the employee wishes, or for as long as the GIC lasts. Typically, GICs have maturation periods of three to five years. At maturity, the employer and issuing company may enter into a new GIC. This new GIC may have a different interest rate, given the current interest rates and market conditions. Representative current GIC interest rates for certain amounts and time periods may be found in the financial pages of some publications.

GICs are backed by the issuing company. Therefore, when considering investing your money through a GIC, you should take a look at the financial soundness of the issuer. There are state guaranty funds that cover insurance companies, but there is no federal government insurance covering GICs that would be comparable to the FDIC’s insuring bank deposits. While they aren’t as safe as federal insurance protection, your principal will remain safe even when interest rates rise, barring default by the issuing company.