The Federal Reserve's repeated interest rate cuts are good news if you're a borrower, but they're bad news if you're trying to save money.Making sure you have the best rate available is more important than ever. A couple of Web sites do most of the comparison shopping for you, but before you can pick your next savings instrument, be sure you know what you're getting into.
Pick your vehicle
Your plans for your savings should determine the type of savings vehicle you choose. For instance, someone looking for a place to stash an emergency fund should look at liquidity, since he or she may need the cash at a moment's notice. A money-market mutual fund or deposit account would be the best options since they both offer check-writing capabilities. Money-market accounts offer the additional security of FDIC insurance, but limited check writing, penalties and lower yields can be a high premium to pay. Money funds are operated by mutual fund families and are not FDIC protected.
If you're unlikely to need the money unexpectedly, a collection of certificates of deposit would probably be the best bet. CDs are issued by banks and deposits are FDIC insured. You can also invest in certificates through a broker. In exchange for yields that typically beat money-market accounts or funds, you'll have to give up some liquidity -- locking your money away for one month to five years (the longer the term the higher the rate). You'll probably have to pay a penalty if you take your money out before the term is up.
Shop around
First, compare the interest on your savings to the highest yielding CDs or money-market accounts in your area. You can also compare the latest money fund yields at iMoneyNet.com.
Don't discount dot-com banks. Yes, it's been a rocky couple of years for online businesses, but many Internet-only banks are still thriving, probably because low overhead allows them to offer better rates on CDs and money-market accounts.
Once an account catches your eye, check the fine print. For a money-market account or mutual fund, double-check account minimums, fees and expenses, limits to check writing and alternatives to check writing (telephone, Internet or ATM transfers, for example). With a CD, check the penalty for premature withdrawals, find out if the CD is callable and don't confuse the call date and redemption date.
"Ladder" your money
For money-market funds, moving your money is as simple as writing one check. But for CDs you can never be sure if rates will go up after you make your deposit. And do you really want to lock all of your money up for the same period of time?
The best way to maintain liquidity, boost yield and protect yourself against rapid rate changes is to "ladder" the maturity dates of your CDs. This is really a form of diversification. You spread your money over several different maturities: say one-fourth of your CD money in three-month certificates, one-fourth in six-month certificates, one-fourth in one-year certificates and one-fourth in two- or three-year certificates.
If rates rise, your short-term CDs will mature in time to reinvest your principal at the new, higher rates. If rates fall or stay flat, at least you've locked in the higher two- or three-year rate. By the time those certificates mature, rates could be heading higher again.
GETTING STARTED
