With the following savings options, the principal is guaranteed (or close to guaranteed), and the rate of return should keep you even with or slightly ahead of the inflation game:
Local Savings Bank
There’s something to be said for keeping at least a small balance at the neighborhood bank. I do. Need a loan someday? It may be easier if you are a regular customer. Local businesses are also more likely to accept a check drawn on a local bank. Then there’s the “bank experience,” which may be especially important if you’re a parent. Each of my two children has a saving account at the corner bank, and they love going there for the free plate of cookies.
At all savings banks in the United States, deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). Even if the bank goes under, you’re covered. The interest rates paid by local banks tend to be very modest, more modest than those paid by most bonds.
Certificates of Deposit (CDs)
The longer you’re willing to commit your money to the bank, the higher the interest rate. Generally a 6-month CD may pay an interest point more than passbook savings, a 12-month CD may pay a bit more, and an 18-month CD yet a wee bit more. If you have one to several thousand dollars sitting around, perhaps you might put one-third into each. That way, you’re not tying up all your money for the entire time, and if interest rates go higher in six months, you’ll be free to take part of your money and upgrade to a higher-yielding CD.
Shop for the best rates at www.bankrate.com or www.money-rates.com. And especially if you’re dealing with a local bank, ask to talk to the manager and see if you can negotiate something higher than the advertised rate. CD rates are usually comparable to very short-term bonds but are not on a par with longer-term bonds.
Internet Banking
Consider opening an account with a Web-based, FDIC-insured savings bank, such as www.emigrantdirect.com or www.ingdirect.com. The rates on savings accounts are often comparable to one-year CDs, and you don’t need to tie up your money at all.
Money Market Funds
Money market mutual funds are not insured by the FDIC so they aren’t quite as safe as bank accounts or U.S. savings bonds, but they are almost as safe. They tend to offer a slightly higher return than bank accounts but not as much as a bond portfolio. If you hold one of these funds outside of your retirement account, you may want to choose a tax-free money market fund, especially if you are in a higher tax bracket.
Note that with money market funds, your principal is secure but the interest rate is not; it can, and often does, vary from day to day. That’s just the opposite of a bond, by the way: With a bond, your interest rate is fixed, but the value of your principal can vary day to day.
Short-term, High Quality Bonds
Short-term bond mutual funds and exchange-traded funds, both taxable and tax-free, are similar to money market funds and often pay a bit more.
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