Every investor eventually faces the same question: what do I do with cash I need soon but cannot stand losing? Money for a down payment, a tax bill, or a short-term goal should not ride the stock market, but leaving it in a checking account earning nothing is quietly expensive. Three safe options dominate the conversation: Treasury bills, certificates of deposit, and money market funds. They look similar at a glance, but the differences matter for taxes, liquidity, and yield.
The Three Contenders, Briefly
Treasury bills are short-term debt issued by the U.S. government, sold at a discount and redeemed at face value. Terms run from four weeks to a year. They are considered the safest investment in the world, and their interest is exempt from state and local taxes.
Certificates of deposit are bank products where you lock money for a fixed term in exchange for a guaranteed rate. They are FDIC-insured up to $250,000 per bank, and terms run from a month to five years. Rates are fixed for the whole term.
Money market funds are mutual funds that hold very short-term, high-quality debt like T-bills, commercial paper, and bank certificates. They aim to keep a stable $1 share price, pay daily interest, and let you withdraw anytime. They are not FDIC-insured, though they are considered very safe in practice.
How to Choose Between Them
Start with your time horizon. Money you might need next week belongs in a money market fund or a high-yield savings account, because CDs and even T-bills lock you in for a term, and breaking a CD early triggers a penalty. Money you will not touch for three months to a year can go into T-bills or CDs, where you typically pick up a slightly higher yield for the commitment.
Compare yields after taxes. Treasury interest escapes state and local income tax, which makes T-bills especially attractive in high-tax states like California or New York. CD interest is fully taxable everywhere. Money market funds are a mixed bag; government-only funds get the state tax break on the portion that is Treasury-backed, while prime funds do not. Run the after-tax math before picking.
Liquidity and Convenience Matter More Than You Think
A small yield difference of half a percent on a $50,000 balance is $250 a year, meaningful but not life-changing. Meanwhile, the cost of illiquidity is real: if an emergency forces you to break a CD early, the penalty can eat months of interest, and a T-bill sold before maturity can lose a little if rates have risen. Money market funds and savings accounts never punish you for withdrawing, which is why they remain the default for emergency funds.
Convenience also varies. T-bills are bought through TreasuryDirect or a brokerage, and you must manage maturities, though auto-reinvest makes it easy. CDs are trivial to buy at any bank or brokerage. Money market funds live inside your brokerage, and many pay better than a bank savings account with the same flexibility.
A Simple Framework
Keep your true emergency cash, three to six months of expenses, in a high-yield savings or money market fund where it is instantly accessible. Put known upcoming expenses with a fixed date, like property taxes or a planned purchase, into T-bills or CDs matched to that date, a mini-ladder works well. And if you live in a high-tax state, favor T-bills and government money funds for the state tax exemption. Cash is a position, not an afterthought. Where you park it should be a decision, not a default.
