Cash Gets Big Return

If you're looking to improve your bottom line at a time when interest rates are moving up, you'll be happy to know there are ways to do that. Ray Hennessey, editor of SmartMoney.com offers some suggestions.

Cash is the best place to start. When people think of their portfolios they think about stocks and bonds. "You really should be increasing your cash position know because you can make money on it," explains Hennessey.

Interest rates currently allow for some good returns. The average money market pays off about 4.7 percent as compared to the 0.8 percent year-to-date S&P 500 and the 3.6 percent year-to-date on the Dow Jones Industrial Average. "Interest rates are fairly steady on money markets," Hennessey says.

If you don't have a large cash position, you should probably increase to the 5 percent or 8 percent level. During the Greenspan years, because interests rates were so low, you were encouraged to save money. Now that interest rates have been inching upwards, it's the best time to save your money.

Regular savings accounts don't pay off as well. "I'm not a big fan of the passbook savings accounts in terms of an investment vehicle," says Hennessey. "If you've got a significant amount of money in there, roll it into a CD." This will give you a bigger return.

Tuesday's interest rate meeting could send rates in either direction. "I really think they will take a pause," Hennessey predicts. "I think they will take a breath. But that doesn't mean that the rate hike momentum is over." If the rate does go up again, the cost of borrowing becomes more expensive, but you will be rewarded for saving your money.

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by Jenn Eaker