Safety first: Protect your cash in turbulent times

Key Points

While cash may be king in these troubled times, it's important to understand that keeping your cash invested wisely is an essential part of protecting your financial future.

With Federal Reserve cuts in interest rates at an all-time low, the yields on cash equivalents are dishearteningly low.

Look first to your bank

From the standpoint of pure safety, Federal Deposit Insurance Corporation (FDIC) insurance makes bank accounts one of your best bets.

Maximum coverage of $250,000 per account owner means that a married couple can protect as much as $1 million at one bank, simply by setting up several accounts with different ownership categories.

After Dec. 31, 2009, the FDIC maximum coverage will revert to $100,000, but combinations of joint and single ownership will still allow for several times the maximum coverage at each bank.

Keep in mind that FDIC insurance covers not only conventional checking and savings accounts, but certificates of deposit (CDs) and money market accounts in any combination as well.

In both our personal and business lives, checking accounts should serve a clearly defined and strictly limited purpose.

Smart money managers keep a minimum amount of money in checking accounts that pay little or no interest. Everything else belongs in accounts that will bring in the highest possible interest while still enjoying the protection of FDIC insurance.

Certificates of deposit

Despite being passed up by some investors, bank certificates of deposit (CDs) are a good choice for longer-term investments in this economy.

Interest rates are all over the board these days, depending on how much the bank needs the money. Check your local banks first, but don't hesitate to look nationally.

For a current check on average rates, log on to http://www.bankrate.com/. At press time, average CD rates were ranging from 2.74 percent for a six-month CD to 3.27 percent for a five-year term.

In general, online banks tend to pay relatively higher rates than local banks, though there are always some exceptions. Among the better-known online banks are ING Direct ( http://www.ingdirect.com/), (888) 464- 0727, and Dollar Savings Direct ( http://www.dollarsavingsdirect.com/), (866) 395-8693. There are many other FDIC-insured online banks.

In general, the longer the term of your CD, the higher the interest rate. Whether you decide to go online or stick with local banks, it will pay you to shop around before you commit your money.

In order to avoid a penalty if you need to cash in a CD before its maturity date, you should consider using the laddering technique. For example, by dividing your kitty into four or five CDs with maturities ranging from six months to three years, you'll never be far from penalty-free cash.

If you have a brokerage account, you may purchase CDs through your broker on the open market. Most will have a number of CDs from a variety of banks, with varying maturity dates and interest rates.

If you decide to choose the convenience of allowing your broker to shop around for your CDs, keep in mind that they will be registered in your broker's name as custodian, just as your stock purchases are.