Where to Park Cash in an Uncertain Market

The recent development in the equity market made cash and safer investments such as government bonds look attractive. If holding on hard cold cash can calm your nerve in a time of market uncertainty, there are several options you can explore to safeguard your hard earned money and still make them grow. Of these choices, my favorites are online savings accounts and Treasury bills, though I am not purchasing any T-bills now. For online savings accounts, they have been at current rates for quite a long time and the situation could change next month if the Fed goes ahead with a rate reduction as many have hoped for. If a rate cut indeed happens, stock markets could react favorably to the move.

Savings account at brick-and-mortar banks

It’s very convenient to do business with a bank that has branch office in the neighborhood. However, what they offer for their traditional savings accounts probably doesn’t deserve your time, let alone your money. For example, I have Bank of America as my primary bank, but the rate of their regular savings account is a close-to-nothing 0.2% APY. Except the checking account, I don’t want them to handle any of my money.

Online high yield savings accounts

With all the “Direct” banks that only exist online, you can easily find a high yield savings account that pays 5+% APY for your money with very small or no minimum. For example, from BestCashCow.com,

• HSBC: 5.05%APY, $1 minimum
• Emigrant Direct: 5.05%APY, $1 minimum
• GMAC Bank: 5.30%APY, $500 minimum
• IGoBanking: 5.30% APY, $1 minimum
• UFB Direct: 5.31%APY, $1 minimum
• Amtrust Direct: 5.36%APY, $1 minimum

Getting an account with these online banks is very easy and most of them support ACH fund transfer. In addition, many online banks also offer interest bearing checking accounts. Here’s a list of banks with interest checking and savings accounts.

Certificates of deposit (CDs)

While banks offer the lowest yield for their traditional savings accounts, the rate of the banks certificates of deposit is quite acceptable. Use Bank of America as an example again, their 4-month CD has a yield of 5.20% APY with a minimum of $5,000. Unlike online high yield savings accounts which usually have low minimum balance requirement, the minimums of CDs are considerably higher, but the money is tired up anywhere from 3 months to 5 years. According to bankrate.com, the average yield of 5-year CD is 4.92%, not necessarily better than an online savings account.

Money market mutual funds

Money market mutual funds invest in short-term securities such CDs, Treasury bills and high quality corporate loans. Though these funds may give investors better returns, they, like any other mutual funds, are not FDIC insured. An example of money market fund is Vanguard Prime Money Market Fund (VMMXX). The fund currently has a 7-day yield of 5.10% after expenses. However, its 3-year average yield is only 3.73%. In addition, the fund requires a minimum investment of $3,000.

Treasury bills

Another option for short-term investment is Treasury bills with three maturities: 4 weeks, 13 weeks, and 26 weeks. Every week, Treasury auctions these bills and determines their investment rates (APR). The latest auctions put the rate of 4-week T-bill at 4.847%, 13-week 2.919%, and 26-week 4.098%, again not as desirable as online savings accounts at least for now. However, since interests earned from T-bills are exempted from state and local income taxes, the yields are little higher depending on the state and local tax rates. T-bills are backed by the government.

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