The fear, uncertainty and volatility in the stock markets has many investors sitting on the sidelines. If you're one of them, where's the best place to stash that cash?
For starters, the best place isn't under your mattress. If you hang on to your money, you stand to lose purchasing power over time because your savings won't keep pace with inflation.
Meanwhile, the crash in the financial sector means that even some of the "safer" options for cash -- such as money market accounts -- aren't looking so good. Locking all your cash away in a long-term, FDIC-insured certificate of deposit, or CD, isn't all that appealing either, since it means you may not have access to your money if the market starts to recover.
Instead, your best bet is to mix things up. Start by putting some of your cash into a high-yield savings account, with either an online or traditional brick-and-mortar bank. (Make sure it's with an FDIC-insured institution). The national average for interest rates offered on savings accounts is only 0.42%, according to BankingMyWay.com. But banks in states such as New York and North Carolina are offering rates as high as 2.5% or 3%.
Keeping about 15% to 20% of your available cash in an FDIC-insured account means that it is safe in the event of a financial meltdown. (Bear in mind that the FDIC insurance limit has been raised from $100,000 to $250,000 per account holder at different institutions as part of the federal bailout bill.)
Consider keeping another 40% of your cash in short-term CDs. Rates on CDs generally are better than with bank accounts, but the higher rates mean you also lose access to your money for a while. The national average for interest rates offered on three- and six-month CDs are just 1.74% and 2.04%, respectively, according to BankingMyWay.com. But depending on the money you have to invest and where you are in the country, rates on short-term CDs at competitive banks range as high as 5%.
Advice: Build a short-term CD ladder with three- and six-month maturities. When it comes time to roll over your money, you can either reinvest in a recovering market or hunt around for a better rate on your next CD.
In the meantime, keep the rest of your cash on hand with a money market fund. Despite the recent problems with these funds, they still offer decent rates while leaving you with full access to your cash. (And money market funds are much safer now that the U.S. Treasury has agreed to guarantee their value.) Funds like Vanguard's Prime Money Market Fund currently offer rates of between 2% and 3%.
If you play your cards right, cash will be on hand to take advantage of a resurging economy but still working safely for you on the sidelines. Just remember that timing the bottom of a market is next to impossible, so don't wait too long before getting back into equities.