Ways to Stash Your Cash: Part II

Posted by: Lauren Young on July 26, 2008


Here’s another plan for an investor with $1 million who is look for a safe place to park cash for the next year. This recommendation comes from Stacy Francis of Francis Financial in New York.

FDIC Insured Up To $100,000

$100,000 HSBC Direct Savings Account – APY Rate – 3.50%

$25,000 Vanguard –3 Month CD – APY – 2.75%

$25,000 Vanguard –6 Month CD – APY – 3.30%

$25,000 Vanguard –9 Month CD – APY – 3.60%

$25,000 Vanguard –12 Month CD – APY – 3.90%

SIPC Insured Up To $500,000 ($100,000 of this can cover cash investments)

$100,000 Vanguard Prime Money Market – APY 4.11% (One Year Return ended 6/30/2008)

$400,000 Vanguard NY Tax-Exempt Money Mkt – 2.88% (One Year Return ended 6/30/2008)

$300,000- iShares Lehman TIPS Bond Fund –15.35% (One Year Return ended 6/30/2008)

Her tips:

Savings Accounts
When choosing a bank, make sure that they are FDIC insured and that the total of all of your deposits at that bank doesn't exceed $100,000. If the bank goes under then your money will be insured up to $100,000. Savings accounts tend to give you higher interest rates than a checking account.

Here are the banks with the highest Annual Percentage Yield in the New York Metro area, according to Bankrate.com

Certificates of Deposit (CDs)- CDs can earn a fixed rate of interest over a certain term period, which can range anywhere from three months to five years. The longer the term, the higher the interest rate is. CDs can also earn interest at adjustable rates that are linked to an index. If you withdraw funds from a CD before the maturity date, you may have to pay a penalty. Bank CDs are insured by the FDIC as long as the bank you buy the CD from is FDIC-insured. Rates can vary significantly from bank to bank, so it is wise to shop around for the best rate.

CD Laddering- CD laddering allows you to lower your risk and increase your return while still keeping your funds liquid.

You start the ladder by buying several CDs at one time but with different maturity dates, for example, one year, two year, three year, four year, and five year CDs. Every year one of your CDs will mature and you can roll it over into a new CD with a longer term and a different interest rate.

For example, assume you have $100,000 to invest. You research CD rates and identify the bank with the best deals that meet your criteria. Then you purchase five CDs: CD #1 for $20,000 for a one-year term, CD #2 for $20,000 for a two-year term, CD #3 for $20,000 for a three-year term, CD #4 for $20,000 for a four-year term; and CD #5 for $20,000 for a five-year term.

As each CD matures, roll it over into a new CD for five years. You can choose a shorter or longer term when you begin the ladder, but the key is to use the same term for each one once you start rolling them over at maturity. At the end of five years you'll have five CDs with one maturing every year after that, so you will never have all of your money tied up long-term or at lower than market interest rates.

Treasury Inflation – Protected Securities (TIPS)- The principal of a TIPS increases and decreases with inflation as measured by the Consumer Price Index. TIPS pay interest twice a year at a fixed rate. You can purchase TIPS from TreasuryDirect and Legacy Treasury Direct through non-competitive bidding. The 20-year TIPS is no longer sold in Legacy Treasury Direct, but it continues to be available in TreasuryDirect. The maturity terms for TIPS are 5 years, 10 years and 20 years. One thing to remember about TIPS is that if the principal grows then the growth will be taxed as income in that year, even if the security has not matured. Since inflation rates seem to be on the rise, TIPS are a solid investment.

Reader Comments

Morris Armstrong

July 28, 2008 10:04 AM

While I can appreciate that this is just a person's suggestion I think that it is rather inappropriate to show past returns when discussing 'yield" which is something one usually associates with cash. For example the 7 day yield on the Vanguard Prime MM Fund is 2.21% which is quite different than the return of 4.11. Same for the tax exempt fund, the 7 day yield is 1.72.

I wont even comment on the TIPS since is there is a rise in interest rates then the value of TIPS will decrease. TIPS outperform ordinary debt in an environment of steady rates and rising inflation.

Again I can appreciate that it is a construction of a cash portfolio I just question the inappropriateness of mixing yield and return without clearly clarifying that to your readers and also putting 30% of a portfolio into something as volatile as bonds under the pretext of safety just because it rose 15% the previous year.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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