Keep My Money Safe and Let It Grow

Where do you keep your cash now?

In August 2007, when this crisis was still in the early stage, I talked about where to put cash in an uncertain market. One year later, the uncertainty remains and things are not getting better. The housing market, the stock market, and the overall economy. All struggling. In fact, risks have increased dramatically.  Three of the five largest investment banks have disappeared and the largest insurer has to be rescued by the government. One year ago, what happened today was just unthinkable.

The environment has changed a lot in one year. What seen as safe investments (such as money-market funds) are not as safe now as they used to be. With all the uncertainties around us, we want to safeguard our hard-earned money, which is the top priority, and let it grow at the same time. For that, we are not going to put our money under the mattress, which neither is safe nor can it grow. So what options do we have now?

Online Savings Accounts

This is, and has always been, our first choice for safety, liquidity, and returns for cash that we don’t want to invest. Though the number of banks that failed this year has increased a lot, we are not terribly worried about our banks and the majority who responded to my poll after the collapse of IndyMac shared the same view (more than 71% respondents said they are not concerned). As long as my banks are FDIC insured, which they all are, we are not going to lose a penny (within the limit of course), even if the bank fails (check out how to protect your money against bank failure).

While every FDIC insured online bank is safe (in the sense that the money won’t be lost), the returns are different. If you are like me who is always looking for higher returns, then check out these high-yield online savings/money-market accounts:

• EverBank Money Market Account (details here and here): 4.65% 3-month Bonus Rate, 3.51% on-going APY, 3.82% first-year APY, $1,500 minimum;
• DollarSavingsDirect Savings Account (details here): 3.75% APY 4.00% APY, $1,000 minimum;
• FNBO Direct Online Savings Account (details here and here): 3.50% APY 3.25% APY, $1 minimum;

In addition, there are also banks with less attractive rates, such as HSBC Direct (3.00% APY, details), E*Trade Financial (3.30% APY, details), IGoBanking (3.28% APY, details),  WT Direct (3.31% APY, details) and ING Direct (2.75% APY). Of course, always make sure the bank of your choice is a member of FDIC and don’t go over the insurance limit!

Certificates of Deposit

The second option is certificates of deposit (CD). However, for short-term CDs (less than 12 months), the rates are hardly any better than rates from online savings accounts, except those promoted as limited time offers, such as WaMu’s 5.00% APY 12-month CD promotion some time ago. In addition, CDs usually require much higher minimum, in addition to the fixed term. If you can go for a longer term, then there are attractive good deals out there. For example, ING Direct just has a promotion for 18-month CD for 4.50% APY. Other good 1-year CD products are:

• VirtualBank: 4.45% APY, $10,000 minimum;
• GMAC Bank: 4.35% APY, $500 minimum;
• E-Loan Bank: 4.36% APY, $100,000 minimum;
• AmTrust Direct: 4.30% APY, $1,000 minimum
• Umbrella Bank: 4.10% APY, $1,000 minimum;
• Capital One Bank: 4.00% APY, $5,000 minimum;

With CDs, you can lock in a good rate when it’s available, but that’s just one side of the story. It’s good to lock in the rate if you expect the interest rate to go down in the future. That may not be the case now. The Fed has kept its benchmark rate steady for quite sometime, but that could change if the inflation situation gets worse. If the interest rate starts to rise,  better deals may be yet to come.

Treasury Bills

One year ago, 4-Week Treasury Bill is still one option for short-term investments. But now … unless you want to get close to zero return for your money (the latest 4-week rate is a meager 0.304% APR). Government bonds are still the safest investments, but the return is probably the lowest.

Don’t Forget Investing

Do you see this market turbulence as an opportunity?

Though I didn’t make big investments during the market downturn, I did buy a few beaten down stocks when I thought the time was right. At the same time, I have maintained my regular mutual fund purchases. More importantly, I didn’t sell anything because I don’t think getting out of the stock market when it is down is the right thing to do if time is on my side. A couple of days ago, Jonathan at My Money Blog asked two questions when selling stocks. My answer is

I always ask myself “Do I need the money now?” when making a decision on selling a stock and the answer I have is “No” most of the time (the exception is when I need to raise money to buy other stocks). So I basically keep buying even though some stocks have suffered badly recently. I am not a fund manager, so I don’t need the performance number to please anybody.

I have patience

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