When it Comes to Your Cash, Think Safety

Yields are in the cellar, but you don't have to settle for 2%.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, August 2008

OUR READERS
WHO: Christian and Lori Kuzan, both 40
WHAT: Health-care finance analyst and insurance agent
WHERE: Hamburg, N.Y.
FAMILY: Amanda, 13
SYMPTOM: They need to build a cash reserve and invest it safely

Oh, the joy and the pain. Chris and Lori wed last September and settled into Chris's home with Amanda, Lori's daughter from a previous marriage. Then, in January, fireplace ash ignited in the garage and incinerated the 60-year-old structure. The family now rents an apartment while awaiting completion of a new and larger home.

Insurance erased the old mortgage and other debts, but Chris and Lori are hardly on Easy Street. There's the mortgage on the new house, which will cost $259,000, and all the furniture they need to buy to fill it. Saving for Amanda's education is also a consideration.

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The Kuzans have relatively little cash, so Chris is anxious "to recapitalize my life." This will get easier once the Kuzans solve another problem: Lori's old house, located in a depressed suburb of Buffalo, has been vacant since the wedding. Selling the house would free up $900 a month, which could be used for college or retirement savings.

Once Chris and Lori start accumulating some cash, they'll have to determine where to put it. Given today's low interest rates and the credit-market freeze-up over the past year, it's not a simple decision. The turmoil unmasked the risks in ultra-short-term bond funds and bank-loan funds, whose popularity had zoomed because they were perceived as relatively stable investments that paid a bit more than CDs and money-market funds.

Advisers urge young families like the Kuzans to avoid things that could suffer in a weak economy or that own esoteric investments that are hard to understand. Paul Baumbach, of Mallard Advisors, in Newark, Del., prefers ING Direct's savings account, which yields 3.0%, and Vanguard Prime Money Market (symbol VMMXX), which pays 2.2%. Paul LaViola, of RTD Financial Advisors, in Philadelphia, suggests splitting savings between the Vanguard fund and a three-month or six-month CD. Three-month CDs yield as much as 3.0%, while six-month certificates pay up to 3.4%.

Another idea is GE Interest Plus, which combines the extra yield of a short-term corporate bond with such money-market-fund features as checking. "It's like a very short-term bond you can redeem anytime," says Susan Elser, of Elser Financial Planning, in Indianapolis. For accounts of less than $15,000, the yield in mid June was 3.0%. These accounts are not insured, but General Electric is as financially solid as they come.

Of course, Chris and Lori might not want to take any risk with their savings. The good news is that short-term yields aren't likely to go much lower, if at all. And with CDs and money funds, you don't have to fear that a financial conflagration will burn through your cash the way the fire burned through Chris and Lori's house. You can replace a home -- but if you lose your savings, that's another matter.

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