With interest rates nearly as low as they can go, most investors
looked to the stock market
to maximize both their income and their expected long-term returns.
But for short-term money needs, there's
no good alternative to holding cash
. Fortunately, some banks offer you much better rates than
The wisdom of having money in the bank
From an investing standpoint, holding cash doesn't make much sense
right now. Given current rates, money that you have in anything
from Treasury bills and checking accounts to short-term CDs won't
earn you much more than just keeping greenbacks under your
mattress. When you consider that even the meager returns you get on
your cash is subject to income tax and that every penny you keep in
cash is losing purchasing power to inflation, cash looks even less
attractive. That's one reason why dividend-paying stocks have
gotten so popular, with
SPDR S&P Dividend ETF
) managing more than $6 billion in assets for income-hungry
But having cash on hand is a must for every
successful financial plan
. Here's why:
Preparing for the unexpected.
Everyone suffers financial setbacks. Whether it's an air
conditioner that conks out when you need it the most or a car
repair that turns out to be more expensive than you thought,
will avoid having an unexpected expense turn into a
Keeping fresh ammunition.
When stocks and bonds have had long bull runs and are fully
valued, you may not want to invest in them right away. Holding
cash while waiting for a pullback can help you make more from
your investment later on.
So since keeping some cash makes sense, the next question is
simple: where can you make your cash work the hardest for you?
Banks that pay you back
The New York Times
recently published results of a study that looked at the rates that
many banks paid on their savings and money market accounts over
time. You'll often find temporary "teaser" rates from financial
institutions, but they often only last a few months before dropping
back to a relatively unattractive interest rate. In contrast, this
study looked for banks with consistent records of above-average
On the savings account side, the banking arms of
) , and
) topped the list, while
(Nasdaq: ZION) , Ally, and ING Direct all posted rates of 1% or
more during the second quarter.
Money market bank accounts combine features of savings and
checking accounts. You can access funds by check, but there may be
a limit on the number of checks you can write in a given month. On
the other hand, rates tend to be higher than on regular checking
Many of the same banks that had high savings rates also topped
the money market list. But others, including
Hudson City Bancorp
(Nasdaq: HCBK) , One West, and
) banking arm, also reached the upper echelon with minimum rates of
Is it worth the effort?
You may wonder whether you should even bother setting up a
high-yield savings or money market account. With rates at 1%,
you're talking about less than $10 a month in interest even if you
have $10,000 set aside.
But there are several reasons why having a separate cash account
makes sense. First, interest aside, having money separate from the
checking account you use for everyday transactions helps you avoid
dipping into your emergency fund for non-emergency expenses.
Second, rates may be low now, but they won't be forever. While 1%
may not make a big difference to you, the 4% or 5% that you could
have earned several years ago -- and may well earn again in the
years to come -- is much more significant.
Be smart with your cash
Having too much cash in your investment accounts can be the kiss of
death to your long-term returns. But you
liquid funds available at all times to make sure a minor unexpected
mishap doesn't turn into a financial catastrophe. By choosing banks
that pay strong returns while offering the safety of FDIC
insurance, you'll make your money work as hard as it can for
If you have
cash set aside, though, that's a completely different story. In
that case, you may want to boost your income and your return with
dividend stocks. Read the Fool's free special report on dividend
stocks to get 13 strong ideas for your consideration.
Like the commercials, Fool contributor
is very happy with his bank (although it's not the one in the
commercial). You can follow him on Twitter
. He doesn't own shares of the companies mentioned.
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