Consider safe havens for your money while you wait out the financial storm: check out our coverage on high yield savings account options and choices for online bank accounts.
Given the recent volatility and turmoil in stock market, a lot of people have turned to safer investments as they watch their portfolios jump and drop double digit percentages. While some would say, stay the course, others are running for the hills. My personal opinion is that you should keep contributing to your retirement plans, as you always have, but you should consider all new contributions to taxable accounts go into safer havens — like online banks, certificates of deposit, bonds, and tax exempt mutual funds.
Online Banks
Online banks have been around for a while and they represent an absolutely safe “investment” because they are FDIC insured up to $250,000 (through December 2009). They won’t give you rockstar returns, but a steady few percentage points — likely higher than your current bank account — is something you can depend on right now. If a couple percent isn’t enough for you, consider certificates of deposit.
Certificates of Deposit
Whereas online banks offer a high rate and complete liquidity, certificates of deposit offer higher rates but force you to keep your funds locked up for a period of time. CDs aren’t totally illiquid though, you can almost always liquidate them if you’re willing to take a penalty on the interest (often ~3 months). Like savings accounts, these accounts are protected by FDIC insurance and are subject to the coverage limits. The best CD rates today are often better than savings account rates but, again, these aren’t huge numbers and they are subject to tax. Here’s a list of CD rates you can check.
US Savings Bonds
Savings bonds are becoming a more attractive option these days as people are worried about their principal. They are backed by the “full faith and credit of the US Government,” which means they are entirely insured with no limit whatsoever. But, are they good deals? That depends. Series I bonds and TIPS interest rates are affected by inflation, which was 5.9% for the trailing twelve months before August 2008; if things project as they have been trending, that inflation rate will hold for when both bonds are readjusted on November 1st. What’s also nice is that interest from Series I and TIPS are exempt from state and local taxes, thus boosting their return. If you use the interest for educational expenses, then Series I bond interest is exempt from federal income tax too.
Check them out, they’re good options given our uncertain times.
Tax Exempt Money Market Funds
Finally, the last safe option is a tax exempt money market funds. Tax exempt money market funds are funds that invest in short term tax exempt securities, such as municipal bonds. Vanguard has a Tax-Exempt Money Market fund (VMSXX) that currently yields about 4%, with a 0.10% expense ratio. If you’re in the 25% tax bracket, that 4% yield is the equivalent of a taxable 5.33% yield (and the higher your tax bracket, the better is your taxable equivalent yield). Money market funds aren’t 100% safe (as we’ve seen recently with how the Lehman bankruptcy broke the buck of some major funds) but these invest in tax exempt securities which are, presumably, safer than corporate bonds.
These are four viable “safe haven” options if you want to wait out the storm. For more on this subject, you can also check out these articles: Best Places For Your Money When The Stock Market Tanks and Where Should You Put Your Cash? 5 Steps To Safety.
This is a guest post from one of the personal finance bloggers I greatly admire. Jim writes at Blueprint for Financial Prosperity, a personal finance blog that rocks! Jim’s blog was one of the original personal finance sites I’d surf while I was at work 
, a habit I haven’t broken. Pick up his daily writeups by subscribing to his RSS feed.
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Awhile back, I took some EE savings bonds that my great grandma bought for me and cashed them in. She paid about $1100 for them over the years, and cashed them in for about $5400, thanks great-grandma!!! Now it’s time for my kid to start getting them…
Thanks Kurt! I’ll be publishing a follow up post to this one soon. It’s always good to know all our options.
I personally find that the tax exempt money market funds are the most attractive options as they provide liquidity and high interest rates at the same time.