Every time Easter approaches, I find myself thinking of baskets, eggs and all the other words we investors typically associate with portfolios and diversification.
So I was certainly ready with plenty of holiday-themed metaphors when a friend e-mailed me to say he’d sold his house and wanted advice on what to do with the proceeds.
Of course, the first thing I told him might surprise you: I didn’t say to invest in dividend stocks. Rather, I said his primary goal should be establishing a nice liquid emergency fund.
That begs a good question, of course …
Where the Heck Can You Put
Your Keep-Safe Cash These Days?
It’s no secret that interest rates are pitiful. And as I told my friend, you shouldn’t expect much of a return on your emergency funds. Instead, your main goal is having peace of mind and the wherewithal to survive life’s twists and turns.
For that reason, this account should be considered separate from the uninvested cash in a brokerage account. (That money is best left in a money market fund, either Treasury-only or otherwise at this point.)
Certificates of Deposit (CDs) are clearly the old standby, favored by retirees and conservative investors across the country. That’s because they are readily available and generally very safe — until January 1, 2014 your deposits are insured up to $250,000 at each financial institution ($100,000 thereafter).
The two big problems are: Penalties for early withdrawals and paltry rates right now.
In my opinion, the penalties are enough of a reason to look elsewhere for a liquid savings vehicle. But if you think there’s only a slim chance you’ll need the cash over the life of the CD, they might be okay.
If so, you can find the best current CD rates by using a website like www.bankrate.com. Depending on the term and how much you invest, you should be able to get 3 percent or more. Not bad, but remember that the longer you lock your money up, the greater the chance that interest rates will rise and inflation will outpace your return.
Personally, I would trade higher yields for a greater emphasis on shorter maturities right now.
The first and most important part of any nest egg, is a solid chunk of cash.
Traditional savings and checking accounts are another option. They clearly offer the liquidity you want in an emergency account, but your local bank is probably offering a very poor rate of return right now.
So my suggestion is to start looking nationally using websites like www.checkingfinder.com and www.money-rates.com (for Canadians http://www.bankofcanada.ca/en/rates/). A number of financial institutions are working hard to attract new capital at very favorable rates with high-yield savings accounts and so-called “reward” checking accounts.
Many of the best current rates are now coming from online-only banks (often subsidiaries of household-name brick and mortar franchises). Examples include OnBank (a division of M&T Bank in NY), FNBO Direct (First National Bank of Omaha) and Ally (formerly known as GMAC Bank).
It’s worth noting that these accounts often carry a litany of restrictions and requirements such as receiving statements electronically, making regular direct deposits, using debit cards for purchases, etc. Moreover, many of the attractive rates are only applicable on a certain level of deposits (often $25,000).
Still, if you’re willing to play the game … and even spread your money around at a few institutions … you can certainly earn a much higher return than you might believe possible.
What about bonds? For liquid savings, they would be my least preferred choice because you will not have FDIC insurance and CAN experience capital losses. And I would absolutely insist that you stick only to very short-term bond mutual funds and ETFs.
That said, there are relatively conservative funds that are paying out a percent or two in annual interest.
For example, in Treasuries, the iShares Barclays 1-3 Year Treasury Bond ETF (SHY) yields 1.1 percent and carries an expense ratio of 0.15 percent. Meanwhile, Vanguard’s Short-Term Investment Grade fund (VFSTX), which invests in high-quality corporate bonds, currently yields about 2.3 percent. You can find comparable investments from plenty of other low-cost fund families, too. (For Canadian’s http://www.claymoreinvestments.ca/etf/product-list#INCOMEFIXEDINCOME)
Again, I’m not saying that a yield of 1 percent or 2 percent is much to get excited about. And for the bulk of your investments, especially your retirement funds, I have many ideas that will produce double, triple, and quadruple those numbers.
However, we should all recognize the importance of an ultra-safe, ultra-liquid emergency fund … that is kept in an entirely different basket.
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