Where to Stash Your Cash - Fall 2011 Edition

With stocks and even gold plunging, investors are looking for a safe harbor. This drove US Treasury Rates to near zero with the six month Treasury yielding 0.04 percent annually. Vanguard's Prime Money Market is yielding 0.03 percent annually, while Fidelity's is yielding 0.01 percent annually. Luckily, we small investors have ways of safely earning much more by stashing our cash at banks and credit unions.

By the way, I don't just write about these things. I put roughly 80 percent of my fixed income money where my mouth is in CDs and bank money markets, with the remainder mostly in low cost bond index funds. Here's how I go about the analysis and where you too may want to stash your cash, after carefully checking each out, of course.

Best choices for savings accounts
Though savings accounts offer liquidity, rates can change. In selecting my choices for the highest savings rates, I exclude any institutions that require things like a minimum number of debit card transactions, as that's really just cross subsidizing the profitability of one product with another. Finally, I choose institutions that I see have a history maintaining high rates since I suspect you have better things to do with your time than change accounts every month. I started my research with DepositAccounts.com.

The highest paying savings accounts from institutions with a great track record are:

Alliant Credit Union - 1.15%
SmartyPig - 1.10%
Salie Mae Bank - 1.00%
American Express Bank - 1.00%
Discover Bank - 1.00%
ING - 1.00% (1.10% for $50K and 1.15% over $100k)
Ally Bank - 0.99%

These rates may not seem like much but look at the difference in interest over a year for each $10,000 invested vs. the one year Treasury. For example, a $100,000 investment at Alliant Credit Union would earn $1,150, or $1,110 over at six month Treasury. That's not bad pay for an hour's worth of time, in my opinion.

Turn the page for best CD choices
Best choices for CDs
If you are willing to lock in your money for a bit, a Certificate of Deposit may be the ticket. A 5-year Treasury is currently yielding 0.92% annually. Small investors, on the other hand, can earn far more and even have less risk if rates go up.

For quite some time now, I've been a fan of the AllyBank 5-year CD with a minimal 60 day early withdrawal penalty. It's yielding 2.04 percent APY. This is the equivalent of earning well over twice the US Treasury and having an option to bail if rates rise.

In the chart to the right, you can see the estimated annual yield even after paying the penalty. For instance, if you cash it in after one year, you'll earn an estimated 1.70 percent annual yield. That's $170 for each $10,000 deposited.

Because Ally Bank does not have partial withdrawals, they will charge the penalty on the entire CD amount. This problem is easily solved as you could open 10 $1,000 CDs rather than one for the entire $10,000. That way, if you needed $800 for an emergency, you could just break one of the CDs.

Of course, the other reason you'd want to break the CD is if rates go up. Say, in a year, you could now earn 3.04 percent on the same CD. Your penalty would amount to 0.34 percent and you'd earn a full 1.00 percent more each year. That's roughly a four month breakeven and I'd certainly be more than happy to pay this penalty.

I've noted that this CD is the equivalent of buying a 5 year CD with a put option that gives you the right to sell it back to them for 99.66 cents on the dollar, or a 0.34 percent discount.

Another favorite of mine is the Security Service Federal Credit Union 7-Year CD. This CD pays between 3.25 percent and 3.40 percent annually, depending on the amount deposited. The early withdrawal penalty is a maximum of a one year penalty. Again, if rates skyrocket, I'll gladly pay the penalty to get out and start earning more. While the Credit Union states there are thousands of ways to qualify for membership, I've found some of my clients don't qualify. Call them to see if you do.

Click on these links to see some other top CDs.

Before opening, turn the page for some words of warning.
Three warnings before opening CDs
While the savings accounts are pretty straight forward, opening the CDs involve due diligence. Here are three things you want to be sure of:

#1 Stay below FDIC or NCUA maximums - Accounts are insured to $250,000 per depositor but there are ways to maximize your insurance and get millions of insurance per institution.

#2 Make sure you are getting the rate you think - Some institutions like Ally Bank will hold the rate until the CD is funded for a reasonable period of time. Others will not. If the rate changes before the CD is funded, an institution can give you a lower rate.

# 3 Read the fine print - It's important to read the CD disclosure statement and even the member services agreement for a credit union. Avoid an institution that says they have the right to change any withdrawal penalty or right for existing holders.

Don't settle with earning nothing on your cash. Make it work for you.

Author's note: I have deposits at several institutions mentioned in this piece including Alliant Credit Union, Ally Bank, Discover Bank, and Security Service Federal Credit Union.

More on MoneyWatch
Best CD - Better Than Bonds
Interest Rates - How Low Can They Go?
Safe CD To Stash Your Cash
Will October be Sixth Strait Month for Stock Losses?

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

Twitter

More from CBS News