Park your cash like it's a Ferrari

I think the best way to put an extra couple hundred bucks a year in your pocket is to find a good parking space for your cash.  If you have it sitting in your checking account, this was written for you.

Everyday cash: Online savings accounts (currently ~4%)

ING Direct was first with these accounts, but it since got fat and lazy (i.e. got a ton of deposits) so no longer feels compelled to pay a competitive rate (it pays 3.4%).  It was quickly copied by EmigrantDirect (3.6%) and HSBC Direct (3.55%), neither of which are competitive anymore.  About 2 years ago, old-school banks realized they were losing customers, so they created similar accounts that are now the most competitive places to park cash:

• Citibank Ultimate Money account (4% 3/11 update: now 3.25%): This is a savings account with a catch -- to avoid fees, you need to have a Citibank checking account and pay 2 bills a month from the Citi checking account.  The reason I like this account is because you can earn ThankYou points (Citi's loyalty program), which pays me about $100 per year (more details in a future post).  To top it off, you can often earn an account opening bonus in the neighborhood of $200.  The current one (MVS4) expires today, unfortunately.



• Washington Mutual Online Savings account (4%): WaMu offers a 4% online savings account without much hassle.  You have to be a WaMu checking customer to get the 4% rate and avoid fees, but the good thing about WaMu is that their checking account is free.

There are other accounts that offer a higher rate, but personally I would stick with the above.  Other accounts that have historically paid more include:

• E-Trade (4.1% 3/11 update: 3.45%): Sure they pay 0.1% more, but did you know E-Trade also has a mortgage business? (They acquired a bank called Telebank in about 2000.)  If you open one, earn a $25 account opening bonus (expires 3/31).



• Countrywide (4.25% 3/11 update: now 4.05%): This is the company that does home loans.  Mostly to sub-prime customers.  Yes, you should be scared.  But Bank of America is acquiring them, so once that merger goes through, it might be safe(r).  And they are FDIC insured.  You need at least $10,000 to qualify for the 4.25% rate.

Investment cash: Money market funds (currently ~3.5%)

Chances are that you have an ever bigger chunk of cash in your brokerage account.  Brokerages used to pay you a competitive rate on your cash.  But then they started screwing you.  They now earn more in interest income from cash balances and margin loans than from commissions.

Let me repeat: you are being robbed by your broker.  They pay you <1% on your cash, and turn around and invest it on their own behalf at 4%.

You should not let your cash sit idle in a brokerage account.  If you need to keep it in your investment account, buy money market funds.  All brokerages have money market funds that pay much more competitive rates:

• TD Ameritrade: default rate = 0.05% (MMDA) vs. TDAM Class A = 2.43%



• Charles Schwab: default rate = 0.25% vs. Schwab Value Advantage (SWVXX) = 3.52%



• Fidelity: default rate = 0.11% (FCASH) vs. Fidelity Select Money Market (FSLXX) = 3.62%

In addition, there's a relatively new category of broker-offered checking accounts, which generally pay ~3%.  Schwab pays 3.01%, Fidelity pays 2%, and Etrade pays 3.25%.  I find these generally not very compelling because (i) you still need a real checking account for cash deposits, (ii) the interest rates are lower than savings accounts that you can instantly link to checking, (iii) there's higher risk to your savings in case of fraud, and (iv) most brokerages allow you to write checks anyway.  However, the Fidelity mySmart Cash Account deserves a special mention because of a unique feature.  You can set it up so that overdrafts deduct from your money market accounts (if you do not have a margin account).  So you can effectively get 3.62% instead of 2% on your checking.  Not bad.

A note about U.S. savings bonds (currently 4.28% for Series I):

I wanted to mention U.S. savings bonds because they're a good deal.  It used to be a much better deal when they let you pay for bonds with a credit card (and earn miles or cashback) and when they let you buy more than $20,000 of these per year.  But they're still pretty good.

U.S. savings bonds aren't the most liquid instruments, because these bonds act like a 5-year CD -- you pay a 3-month interest penalty for early withdrawal (i.e. redemption) before 5 years.  But I think they're great investments because they pay you not just a high nominal interest rate but also a higher effective rate because they are:

• State-tax free: Interest from these bonds are free from state taxes.  If you live in California, your effective yield is about 0.4% more.



• Tax deferred: You pay interest only when you redeem these bonds.  If you park cash for many years, your account grows tax deferred (like a 401k).  This makes the effective yield even higher.



• Federal tax free if used for higher education: You can buy these bonds for your child or for yourself and use the bond to pay for college or grad school.  Then you don't pay any income tax on the interest.  I did this.  My effective yield was around 7%.

Additional resources:

Since the best place to park cash changes relatively frequently, this information will be stale quickly.  To keep pace with rates, you can check out:

• Bank Deals blog: They have the latest info on interest rates and bonuses from every conceivable bank, including the Buddhist Cow Farmer Credit Union of Montgomery County in Alabama



• Fatwallet APY thread: This forum thread has the latest APY updates, so you don't have to go to every single website