Site search Web search

Where To Find Higher Earning Cash Alternatives

In uncertain times such as these, cash is king. Frightened investors are fleeing to cash, and well-funded cash emergency funds can prove invaluable for families worried about losing their jobs or facing other emergencies. However, with the Fed pushing down interest rates, the after-tax yields on standard cash equivalents such as money markets and savings accounts are not much better than stuffing your money under the mattress.  

Investment professionals don’t advocate stashing your cash in a mattress or coffee can—there are still those pesky issues such as theft and fire—but they do suggest some ideas for getting the most out of your cash. 

Shop around. Money market fund yields have plummeted to nearly half their high of around six percent at the start of the year. Average rates on bank savings accounts have fallen to just slightly over a scrawny one percent, according to www.Bankrate.com —well below the annual inflation rate. Rates for certificates of deposit (CDs) have dropped to their lowest levels in seven years, making it especially tough on retirees who depend on interest earnings from their CDs. Three-month CDs were earning only 2.5[All above from computer file] percent in mid-October, and one-year CDs were earning 3 percent.  

Yet better deals can be had, with some shopping around. Some banks are offering higher yields to customers who keep larger balances (but consult with your financial planner on this; it may not be financially wise to keep too much in cash). Banks that market over the Internet frequently offer higher savings rates—some over four percent. 

Ladder your CDs. One trick, which can be done with bonds as well as CDs, is to ladder them. This means you buy CDs of varying maturities—say from three months to five years, dividing your funds roughly equally among them. When a CD matures, you roll it over into the longest-term CD on your ladder, because longer-term CDs usually earn more than shorter-term ones. After a while, the shorter-term CDs are replaced with longer-term higher-rate CDs, yet you have CDs maturing every few months, making available the cash you may need. 

Ultra-short bond funds. Some of these funds were returning nearly five percent in September. [Lipper, computer file] Investing in these funds, unlike investing in CDs or money markets, risks your principal, especially if interest rates rise again. However, most investment experts consider the risk fairly small because of the short maturities (less than a year) the funds invest in. 

Short-term bond funds. They’re returning better than most ultra-short funds, though with a little more risk because the average maturities are longer (around three years). It’s often best to stick to funds investing in high-quality corporate or U.S. Treasuries (average total return for government bond funds through the first nine months of 2001 was about seven percent, according to Lipper Inc.).  

Inflation-adjusted bonds. Combining a fixed return and an inflation adjustment, these U.S. Treasury bonds are yielding about six percent. You can buy them directly or through mutual funds. 

REITs. Real estate investment trusts (REITs) are higher up on the risk ladder, as are most real estate investments, but REITs generally kick off healthy dividends because they must distribute 90 percent of their net income to their investors. Average yields on the Morgan Stanley REIT index this fall were around seven percent, and you can find yields significantly higher than that. Unless you’re very familiar with REITs, you’ll want to talk to your planner or investment expert. 

Pay off debts. Building easily accessible cash is probably the best option for most families, especially for something like an emergency fund where they might want to keep three to six months of bare-bones living expenses. However, if you’re sitting on a load of high-interest debt, it might be a better move to pay down some of it. Minimum debt is always good in difficult times, and paying off an 18-percent interest credit card (whose interest rates aren’t going down these days) provides a healthy return on your money.  

Just be careful what debt you pay down. With a credit card, you can usually turn around and take a cash advance on the card if an emergency occurs. Accelerate payments on a car loan, that money is gone, short of selling your car. Prepay a home mortgage and you run the risk of not being able to obtain an equity loan later if you lose your job.

Securities offered through Sigma Financial Corporation. A registered broker/dealer. Member FINRA & SIPC.

Planning Services offered through Sigma Planning Corporation, a registered investment advisor.

Any information contained on this site does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser licensed in your state.

We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Asset allocation, diversification and rebalancing do not assure a profit or protect against loss in declining markets. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance is no guarantee of future results.

Investment products, insurance and annuity products:

Send mail to Webmaster with questions or comments about this web site
Copyright © 2009 R & D Financial Services Inc. 2701 Troy Center Drive, STE 255, Troy Michigan 48084
Last modified: 05/11/10