For Some, Savings Accounts, CDs, Money Markets Are the Way to Go

Nov. 10, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- When it comes to their money, time is precious for Joanne and Bill.

The retired Dallas couple knows that they don't have the time to recoup any investment losses, unlike younger consumers.

So when the plummeting stock market began beating up Joanne's Individual Retirement Account last month, she moved the money to an IRA savings account at City Credit Union that doesn't invest in stocks.

"It has relieved our minds," said Joanne, 77, who, along with her 83-year-old husband, asked that their last name not be published. "It's been more of a secure feeling because there was no way we could replace what we lost."

She said she lost $4,000 in October, the stock market's worst month in 21 years.

Given the financial turmoil engulfing the world, it's tempting to stash your cash only in super-safe places, like Joanne and Bill did, and not subject your hard-earned money to the vagaries of the stock market.

If that's your objective, your alternatives include money market mutual funds, money market deposit accounts, certificates of deposits and savings accounts.

"For risk-free investments, cash, savings accounts and CDs are the best of the lot," said Greg McBride, senior financial analyst at Bankrate .com, which tracks consumer interest rates.

But be forewarned: In exchange for the safety of these vehicles, you give up the potential for the higher return that stocks offer.

Federally insured

Savings accounts, certificates of deposit and money market deposit accounts are low-risk investments that share one key advantage -- they are each insured by the Federal Deposit Insurance Corp.

In the wake of the recent economic turmoil, Congress temporarily increased the FDIC's deposit insurance from $100,000 to $250,000 per depositor through Dec. 31, 2009.

That also applies to deposits insured by the National Credit Union Administration.

After 2009, the coverage limit will return to $100,000 for all deposit categories, except IRAs and certain retirement accounts, which will continue to be insured up to $250,000.

Deposits in different insured banks are insured separately. Deposits in separate branches of an insured bank are not.

However, deposits maintained in different categories of legal ownership at the same bank can be separately insured. For example, each co-owner in a joint account is insured for up to $250,000.

The backing of the FDIC makes bank savings accounts super safe -- but the payoff can be underwhelming. The average yield on a regular savings account last week was 0.41 percent, though you can get yields as high as 4 percent by shopping around, according to Bankrate.com.

CDs

Certificates of deposits are issued by banks and other financial institutions. In exchange for lending the institution money for a set length of time, you're paid a set rate of interest.

Maturities on certificates of deposit can range from a month to five years. The longer you keep your money in the CD, the higher the interest rate.

For example, last Tuesday, a six-month CD was paying an average 3.03 percent, while a five-year CD was paying an average 3.89 percent, according to Bankrate.com.

Before locking up your money in a CD, make sure that you won't be needing the funds soon. If you take your money out before the CD matures, you pay an early-withdrawal penalty in the form of forfeited interest.

"The principal drawback is the penalties for early withdrawals," said Don Taylor, assistant professor of business administration at the Brandywine campus of Pennsylvania State University.

Money market savings

Money market deposit accounts are interest-bearing savings accounts that typically earn more than a regular savings account.

These are not to be confused with money market mutual funds, which are investment accounts and are not insured by the FDIC.

Money market deposit accounts are less risky than money market funds, but they also earn less interest.

You can write checks off a money market deposit account, but you're typically limited to a certain number of withdrawals each month. Exceed that number and you'll be charged a fee.

Financial institutions also usually charge a fee if you don't maintain a certain balance in your money market account.

So when evaluating a money market account, ask about minimum balance requirements and fees.

Because many banks offer both money market deposit accounts and money funds, you should be clear on which vehicle you're putting your money into.

"You need to know what you're being sold if you're a consumer," Dr. Taylor said. "The bottom line is, you need to ask whether or not it's FDIC-insured. If it's not FDIC-insured, then it's not a deposit product."

Money market funds

Money market funds invest in short-term securities that have minimal credit risks and are highly rated. Examples are U.S. Treasury securities, CDs and commercial paper, which is short-term debt that companies use to fund day-to-day operations.

Safety-minded investors are attracted to money funds in large part because they strive to maintain a price per share of $1.

That means that you can expect to get back $1 for every dollar you invest, plus any interest or dividends the fund earns.

When a money fund falls below $1 a share -- a rare occurrence known as "breaking the buck" -- it strikes at the heart of investor confidence.

That's what happened when the Reserve Primary Fund broke the buck in September, triggering a run on money funds by investors fearful of losing their money.

It also prompted the federal government to establish a temporary guaranty insurance program for money funds.

The coverage is triggered when a participating fund falls below the sacred $1-per-share level and liquidates its assets. In that event, the government will make the guarantee payment to the money fund's investors in about 30 days.

The federal program insures participating money funds until Dec. 18. After that, the Treasury Department will decide whether to extend the program to Sept. 18, 2009.

Participation in the program is voluntary, so you should ask your money fund whether it's covered. Most major fund companies are participating.

If you want an added layer of safety, consider investing in a government money fund. In addition to investing in Treasury securities, these funds also put money into government agency debt and repurchase agreements backed by government entities.

"Government money funds are considered to be extremely safe," said Connie Bugbee, managing editor of iMoneyNet, which compiles money fund data.

However, you give up a higher yield for that added measure of safety because you're assuming less risk.

Inflation

In these uncertain economic times, consumers want to be assured their money is safe. But experts warn to be careful because you can be "too safe" with your money.

"Moving long-term money entirely to cash exposes the investor to the greater risk of inflation," said Mr. McBride of Bankrate.com. "Over a 25-year period, inflation will cut an investor's buying power in half."

Stocks remain the best weapon to combat inflation.

From 1926 through September 2008, stocks had an annual average return of 9.98 percent, compared with 3.72 percent for Treasury bills (a proxy for cash investments, such as money funds).

Over the same period, inflation averaged 3.07 percent a year.

How much you want to invest in stocks, and how much you want in cash, depends on your risk tolerance and how soon you will need the money.

For older consumers, like Joanne and Bill, the safety of their money is objective No. 1 because it's unlikely they would be able to recoup any losses.

As Joanne said: "We don't have the five or 10 years to wait at our age."

THE TRADEOFF

The stock market's recent volatility may make less risky vehicles -- savings accounts, certificates of deposit, money market deposit accounts and money market mutual funds -- more tempting, but there is a tradeoff. Here are the pros and cons of going without stocks:

Pros

-- Your money is not subject to the ups and downs of the stock market.

-- Bank deposit products are protected by federal deposit insurance.

-- Money market mutual funds now have temporary guaranty insurance.

Cons

-- You give up the higher returns that stocks typically generate over the long term.

-- Moving long-term money entirely to cash exposes you to inflation, which saps purchasing power.

SOURCE: Dallas Morning News research

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