Money market rates are at their lowest levels in over 20 years, and have been for a while. Are there any alternatives that can get you a higher interest rate while still giving you the security of cash?
There are a few options when it comes to parking cash. Money market accounts are probably the most popular because they give you the liquidity of cash – you can get your money back at any time – and an interest rate that is usually better than a checking or savings account. But the rates can really vary. I went on line and found rates ranging from 0.10 percent (one-tenth of one percent) to 1.5 percent. Shopping around can make a difference. If you're comfortable banking over the web, on line banks such as ING Direct or HSBC Bank offer competitive money market rates.
CDs are another option. Their rates, however, are very similar to money markets. Bankrate.com quotes average 6-month CDs at 0.98 percent and 12-month CDs at 1.44 percent. These are not terribly different from money market rates, and you have withdrawal penalties.
Short-term bond mutual funds are another option for cash. For instance the Vanguard Short-Term Bond Index Fund invests in good quality bonds with maturities of less than 3 years. It has averaged a 5.30 percent return over the past year. But bond mutual funds come with the risk of loss. The Vanguard fund has a low risk of loss and low expenses, but never the less more risk than cash or CDs.
Right now I have not found any alternative to cash that pays a decent rate without a risk of loss. After all, in these uncertain economic times it's the promise of safety that is driving down rates. But if you're willing to assume a little risk, a short-term bond fund might fit the bill.
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