Those of you who have been using high yield savings or money market accounts have found out that the definition of high is getting rather low. I have accounts at ING Direct, Capital One Direct, iGoBanking, and Virtual Bank; they all started the year with greater than 4% interest yields and now are hanging around between 3% and 4%.

Interestingly, many people, spooked by the subprime credit debacle and the volatility of the stock market, are looking for safe havens like money market accounts and certificates of deposit to park some of their money, but come away disappointed by the current yields. What can you do with fixed income money or an emergency fund?

Here’s some ideas:

1) Comparison shop. Bankrate.com makes this relatively easy. I also really like Bank Deals for getting up to the minute news from all over the country on current rates and specials (like promotional rates for a few months or bonus money for new customers).

2) Buy quality. While not appropriate for an emergency fund, high quality bond funds like the Vanguard GNMA Fund or the Vanguard Total Bond Market Index have done exceptionally well for a long period of time, benefiting from the flight to quality that spooked investors have engaged in. If you’re buying CDs, make sure that the financial institution has the requisite FDIC insurance and stay within the limits. Why take more risk than necessary on this kind of money?

3) Learn what your risk tolerance is. If you absolutely can’t deal with net asset value fluctuation, then a bond fund isn’t for you. However, if you can deal with fluctuation between $9.50 and $10.50 per share and like the protection of government backed Aaa securities, consider a GNMA fund for at least some of this money.

4) Consider municipals or tax free money markets. Municipal bonds offer tax advantages and if you are in a high tax bracket, could end up netting more for you than your typical high yield savings or money market account. There are also tax free money market funds like that from Vanguard to consider.

5) If you don’t need the money or the interest right away, there’s always savings bonds and treasuries. While they don’t have fantastic yields, they are as safe as possible (and in the case of TIPS or I series bonds, offer inflation protection) and give some tax advantages.

Money in bonds, CDs, savings accounts, and money market accounts tends to be money that people don’t want to lose, so buying quality is very important. Yes, high yields are nice, but don’t put this money at risk by chasing additional yield when safety is called for. You have many options as seen above; keep that fixed income money safe and working as hard (and earning as much return) as it can!

6 Responses to “The Incredible Shrinking Interest Rate”

  1. Mrs. Micahon 18 Mar 2008 at 5:38 pm

    I’m definitely planning to buy quality…based on quality theory, too (which I think is the difference between touting the history of VFINX/VTBMX and other non-indexing funds).

  2. JBon 18 Mar 2008 at 6:21 pm

    I really think the only thing that any of us can do is wait it out… and buy more – since everything as far as mutual funds and stock is on sale… might as well buy as much as you can right now. Good post.

  3. [...] Suenaga from Uncommon Cents shows us The Incredible Shrinking Interest Rate, and says, "The "high" in high yield is getting lower and [...]

  4. FFBon 24 Mar 2008 at 6:34 am

    I’ve been thinking about this recently with the huge interest rate drops. Thanks for the info!

  5. [...] Suenaga from Uncommon Cents shows us The Incredible Shrinking Interest Rate, and says, "The "high" in high yield is getting lower and [...]

  6. [...] who don’t think much of bonds, finding decent returns has become more and more challenging. Money market and high yield savings accounts have rates that have plunged in recent months, and certificates of deposit have not done much better. It’s become a real challenge to find [...]

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