savings

So you’ve got some cash on hand that you’re not going to spend right away. It’s a nice feeling, isn’t it? Maybe you’re saving up to pay your property taxes at the end of the year. Maybe you’re looking forward to a cruise next summer. Maybe you’re about to get married. Whatever the case, you’re looking for someplace to stash this cash — someplace not in your checking account, nor under your mattress. With so many options — CD’s, savings accounts, bond funds, money markets — what do you do?

My short answer? Put the money in a savings account. Make sure it’s FDIC or NCUA-insured, though most of them are. Which one? Simple: whatever’s most convenient for you. I’m partial to ING Direct, because they have no fees, a competitive interest rate, and great customer service (in my experience), and they make it ridiculously easy to open targeted sub-accounts for each of your savings goals. But really, whatever’s most convenient for you.

For the long answer, let’s start by assuming that your baseline is an ING account. No fees, as I mentioned, and currently earning 1% interest. What else could you do?

Well, you could put the money into short-term bond funds, but that’s more risk than it’s worth. As of this writing, Vanguard’s Short-Term Investment-Grade Bond Index is yielding 1.68%. So let’s say you had a whopping $10,000 to sock away. That would get you an extra $68 per year over the ING account — less than $6 per month. And remember, bonds are not FDIC-insured, and hence carry risk. How much risk? Well, think on this — when interest rates go up, bond values go down, and interest rates currently have nowhere to go but up. I’m not saying you shouldn’t own any bond funds right now — quite the contrary — but I definitely wouldn’t look to them for short-term saving.

What about a money market mutual fund? No way. Their interest rates are awful. Vanguard’s Prime Money Market is yielding 0.06%. That’s right — less than one-tenth of one percent. That $10,000 would earn you a grand total of $6 for the year. Again, they have their place, but not in your short-term savings.

If you don’t need access, you could put the money in CD’s. I wouldn’t bother, though. A one-year CD might get you 1.3% or so. Is 0.3% (in the above case, $30 per year!) worth the lack of flexibility? As for CD’s with maturities further out than one year, I wouldn’t recommend it, for the same reason you don’t want to put your savings into bond funds — you don’t want your money stuck in CD’s when interest rates go back up!

I’m sure you’re noticing the theme. The interest rates for just about any safe product are close to 1%, and you have to take pretty hefty risks to get anything above that. So take advantage of the lack of interest rate differentiation to look at other factors: convenience, customer service, ease of use, no fees. You’ve got better things to do with your time than to go chasing rates.