Stashing Your Cash: What Now?

stashing your cashWith short-term Treasuries yielding fractions of a percent, people who need safe investments find they’re getting very little for their money. What are the best options for low-risk cash investments right now?

In July, when I last wrote about places to invest cash, money market yields were just above 2%.  Lately, they’re at half that level. Two-year treasury notes are yielding little more than 1% and even a five-year Treasury yields slightly less than 2%.

Cash-type investments are the logical place for money that you expect to spend in the near- to mid-term future (e.g. funds being saved for a home down-payment) or for money being held for possible emergency spending.  In such cases, it’s wisest to use a very low-risk investment with high liquidity (i.e., something easy to access if you need it).  If you don’t need to be free to spend the money in that time frame, you might be able to take a higher level of risk.  With so much uneasiness over the economy and financial markets, “safe” investments are in great demand. But high demand means lower yields for the investments perceived as “safest.”

Short-Term Treasuries
I’m not sure why anyone would buy a six-month Treasury bill with a yield of less than 0.5%; even going out to a five-year Treasury bond provides a pretty measly yield.  Admittedly, since the government has the power to print money, Treasuries are ultra-safe: you can have a high degree of confidence that you’ll get your money back.

If a bond is held for the duration of its maturity, the buyer receives the principal back.  However, if the bond is sold before maturity, the bond’s value may be higher or lower than the price originally paid.  I think there is a considerable risk that interest rates will turn up and that long-term Treasury prices will tank.  Treasury yields appear exaggeratedly low; they’re so low that credit market observers (including the Sage of Omaha) are starting to believe that there is a Treasury “bubble” that will eventually burst.  Treasuries look “safe,” but only if you intend to hold them to maturity.

Short-Term Government Agency Debt
There are several agencies whose debt is backed by the government.  Even Fannie Mae and Freddie Mac debts are now underpinned, since the government has taken the two agencies under control through conservatorship.  Debt from these and other agencies (the Federal Home Loan Bank, Tennessee Valley Authority, Farm Credit Bank, etc.) can be purchased through various brokers, including Fidelity and Vanguard.  Some agency bonds with maturities as short as two years offer yields comparable to a five-to-ten year Treasury.

You could also consider a bond fund that invests in Government National Mortgage Association (GNMA) pass-throughs.  These are pools of mortgage loans packaged as bonds; they entail some risks, but if you pick a fund with a short average maturity (around a year), the level of risk is lower.  In return for taking a bit more risk than a CD would entail, some of these funds have yields above 4.5%.

With Treasuries, agency bonds, or GNMA funds, you do bear some risk that an increase in interest rates will reduce the value of the bond.  But if (for example) you expect to need the money in two years, you could buy a bond maturing in eighteen months, receive the interest, and be assured of getting your principal back in time for your intended purpose.

Online bank savings accounts
Banks have grown tired of paying for tellers and buildings, so these days they seem to be downplaying “brick-and-mortar” banking.  Even banks with a substantial offline presence tend to offer their best interest rates in online-only accounts to push depositors in that direction.  Many large banks pay almost nothing to savings accounts – last time I checked, Bank of America was paying an annual rate less than 0.2%.  But there are a number of online FDIC-insured banks offering rates as high as 2.7%.  Bankrate.com is helpful because it provides an assessment of each bank’s financial health.  Take a look there to see what’s available, but do your homework:  unless you have a lot of cash to park, it’s probably not worthwhile to shift chunks of money from bank to bank in order to chase an additional 0.25% in interest.

Banks periodically offer attractive terms on a variety of deposit accounts.  A terrific site to check for information on these offers is bankvibe.com, run by Dan Nelson.  In addition to news about offers from various institutions, the site maintains updated lists of the best CD and savings account rates available.  Bankvibe.com also provides a short summary of information on the banks with the best rates and encourages readers to share comments on their experiences with specific banks.

Another helpful resource is bankdeals.blogspot.com, which reports regularly on the best bank and credit union deals.  An advantage of these two sites over bankrate.com is that they are independent; bankrate.com is paid by the banks to list their rates.

Certificates of Deposit
Bank CDs at FDIC-insured institutions are the only certificates of deposit that you should consider “safe.” Currently the FDIC has raised its insurance coverage level to $250,000 per bank per depositor, but remember that right now FDIC coverage is scheduled to revert to $100,000 on January 1, 2010.  One-year CD rates are generally maxed out around 2.9%, but on occasion banks offer better deals.  Besides the resources already mentioned, you might check out moneyaisle.com, where FDIC-insured banks will bid for your savings and CD business online.

Depending on how much money you have, you might find it useful to set up a CD “ladder.” For example, suppose you need to maintain a $30,000 emergency fund. The classic “ladder” is one in which you divide up your money and invest it in CDs maturing at different times, like one, three, six, and nine months.  When the one-month CD matures, you roll it into a nine-month CD and in two months the next one matures and you do the same thing.  Alternatively, if you wanted a ladder with CDs rolling over monthly, each month you could shift $5,000 into a new six-month CD.  Then as the CDs mature, they can be rolled over into new CDs.  In the event that you need to use some of the money, eventually you would have a CD maturing every month, so that the money could be spent without incurring an interest penalty.  One benefit of a ladder is that when interest rates eventually rise, you can roll into higher-yielding CDs; in the near-term, if rates fall even further, you’ve locked in current higher rates for several months.

Credit Unions
Credit unions are sort of a wildcard option; some of them (like the one I’m a member of) offer pathetic interest rates on their accounts and CDs, but there are a number of credit unions that offer better rates than most banks. If you’re already a member of one, be sure to examine its current offerings.

In addition to qualifying for credit union membership by virtue of your employment (or that of a family member), there are credit unions that will accept you as a member because of where you live or work or went to college.  Credit unions deposits insured by the National Credit Union Share Insurance Fund are also covered for up to $250,000.  You can search at the National Credit Union Administration web site to find credit unions categorized on the basis of various affiliations.

Walking on the wild side with your cash
Recently I’ve seen a number of articles suggesting alternative fixed income options that offer higher interest rates than CDs.  Be careful about considering such options: if you’re investing money that you can’t afford to lose, be extra sure that you understand the possible downsides of such options. I’ve seen investments like municipal bonds, dividend-bearing stocks, corporate bonds, REITS, and high-yield bonds being touted as places for investors in search of higher yields.  You need to understand that all of these are investments in which you can lose money.  For example, if you’re considering any bond with a maturity longer than a couple of years, make sure you can afford the consequences of having interest rates shoot (or wander) up from their current pathetically low levels.  Any bond, even a Treasury, will decline in value if that happens, and the chances that it will happen eventually seem high.  These are ways to get more income, but you sacrifice safety for a higher yield.  These days especially, you should be suspicious of any investment that claims to offer safety and high yields.

image by: Scorpions and Centaurs

About the author

Thomas Fisher, CFP®
Thomas Fisher, CFP®

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