For years, whenever I wrote an article about where to stash your cash, park your emergency fund — choose your euphemism — it would immediately take on a depressing pall. Those days are finally over.
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Greg McBride, senior analyst with Bankrate.com, said it's now, "a great time for cash investments." This is for two reasons. The Federal Reserve Open Market Committee's string of 1 percent interest rate hikes — the latest of which was presided over by new Fed Chairman Ben Bernanke in late March — boosted the prime rate to 4.7 percent. That's lifted a lot of cash investments already. Simultaneously, though, McBride notes, these short-term rate hikes will help keep inflation low, so the higher return you receive on your money will translate into more buying power.
So, where in this new-and-improved market should you put your money? That depends on a few factors, including what you're planning to do with the money, how much convenience you demand and how much shopping around you're willing to do. The latter has rarely been more important.
According to research from Bankrate.com, which publishes up-to-date charts on the best savings and loan rates in the country (all kinds), the average saving account rate at large banks is still an anemic 0.54 percent.
However, with a few clicks of the mouse, you can find 10 accounts with yields of 4.6 percent or better — half of which have an initial minimum investment of less than $1,000. Here are the options you should consider:
- Souped-up savings and Money Market Accounts. Bank accounts of both of these types offer the benefit of FDIC protection for deposits of up to $100,000.
There are also a lot of banks aggressively looking for your business. Some of them will be online banks rather than brick-and-mortar ones. They keep the rates they pay you on the high end by keeping their own costs down, but also limiting the access you have to your money. There may be no check writing or ATM withdrawals. Instead, you move your money using an online (or phone) transfer to a traditional bank checking account, then pull it out, which means you have to plan your need for cash a few days to a week in advance. Other banks paying high rates these days are of the traditional variety. Again, Bankrate.com, is the best place to shop.
- Money market funds. Money market mutual funds (MMFs) are not run by banks, like money market accounts (MMAs), and they don't have FDIC protection. And returns from MMFs have climbed just like those for MMAs have — in fact, on the whole, they're higher notes Gary Schatsky, a Manhattan-based fee-only financial adviser.
"Banks aren't known to have the highest rates in town. But occasionally they have promotional rates that are quite good." His advice: If you don't want to have to shift your funds from account to account to follow the best rates, find a good money fund with bottom-of-the-barrel expenses like the one at Vanguard, which is currently paying 4.53 percent. "Keep the bulk of your money in the fund, then transfer a few thousand to checking whenever you need it," Schatsky says.
- Certificates of deposit. You can make a little more on your money by locking it up in a CD than you can by depositing it in a money market. Right now, the highest yielding one-year CD is paying 5.27 percent, according to Bankrate.com.
But understand, if you have to pull your money out before the year lapses, you'll pay a penalty of, typically, three-months interest (and occasionally six-months interest). That means CDs aren't places for money that you don't know — for sure — you'll be able to keep your hands off. Again, shopping around is crucial. The difference between the best CD rates and the ones at your local bank can be two percentage points.
Also note: Right now, there's no reason to lock your money up for any longer than a year. The highest yielding percent-year CD is paying just 10 basis points — that's one-tenth of a percentage point — more than the highest yielding one-year CD. Not only do you lose the ability to use your money, you lose the ability to reinvest it when long-term rates become more compelling.
- Short-term bond funds. Finally, if you're willing to accept a little more volatility with the cash you're hoarding in exchange for taking slightly more risk, you may want to look into a short-term investment grade bond fund. Again, because you're dealing in an arena where returns — though better — aren't much more than 5 percent, it's crucial to keep an eye on fees. Again, that's why Schatsky recommends Vanguard where the fees tend to be the lowest in the business. Vanguard's short-term investment grade bond fund is currently paying 4.80 percent.
Finally, the biggest point I can make in this story is that if you're among the people who still have a huge stash sitting in checking thinking that you simply can't make much on that money without putting it at risk: You're wrong. If you have $50,000 earning bupkis in checking and you move it into a money market account yielding 4.5 percent annually, you'll have $52,250 a year from now. That $2,250 could pay off a credit card, make an IRA deposit or take you on vacation. In other words: It's real money.
Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life magazine. She is the author of four books, including "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio, 2004). To find out more, visit her Web site, www.jeanchatzky.com.