| CDs are federally insured
up to $100,000. You can buy them directly from the bank or through a broker. Some
large brokers that do a lot of banking business may be able to get you a slightly
better rate than you could get otherwise. In any case, before you lock up your
money, make sure you know what you are buying. Some CDs pay variable interest
rates and some pay a fixed rate. If the rate is variable, make sure you understand
when and how the rate can change.
If you cash in your CD before the end of the fixed period, known
as the maturity date, you'll probably have to forfeit part of the interest you've
earned, so understand what those penalties
could be. And if you buy from a broker, make sure he has a good reputation. The
Federal Deposit Insurance Corp., or FDIC, has issued several warnings
about brokers who misrepresent what they are selling.
Online bank savings accounts
Some online banks offer the equivalent of a business sweep account to nonbusiness-owning
investors. These accounts allow you to move money from your checking account at
your regular brick-and-mortar bank into their interest-paying savings accounts.
When you need to spend it, you can transfer the money back (the online banks generally
don't offer checking), with no expense and very little hassle. There are no minimums,
and the FDIC insures the accounts up to $100,000. These
accounts can be a great way to save regularly. For instance, EmigrantDirect.com
will allow you to have a prescribed dollar amount automatically moved from your
brick-and-mortar checking account to your online savings -- no fuss and no forgetting. Other
online banks that offer a similar service include IngDirect.com, Capital One and
HSBCDirect.com. The rates among these banks vary a little, and the minimum required
to get the highest interest rate can vary from no minimum to a very hefty one,
so read the small print. There also are discrepancies in the
online bank's policies that may make a significant difference to you, depending
on how you use the account. Some will let you link to a brokerage account. Others
will give you an ATM card so you can take out cash directly without transferring
the money back to your brick-and-mortar checking account. Another
word of warning: These online banks put a five-business-day hold on your money
when you transfer it into the account you have with them. There may be another
hold imposed on your money when you transfer it back to your brick-and-mortar
bank. That can slow down your bill-paying ability. Bank
or investment company money market funds
Your neighborhood bank or
the investment company where you stash your IRA is likely to offer a money
market account or money
market mutual fund. The neighborhood bank's yields might not be quite as high
as those of online banks, but rates are going up. Bankrate can help you find the
highest-yielding
funds in both the taxable and nontaxable categories. If
you are in a high federal tax bracket, investing in a money fund that is not subject
to federal tax can yield a return with greater spending value than one that only
looks higher until you subtract taxes. For instance, if you are in the 33 percent
tax bracket, a 2.5 percent nontaxable yield is equivalent to a 3.7 percent taxable
return. Check it out for yourself on a DinkeyTown
Financial Calculator. Some money market mutual funds impose
high fees. Before you invest in one, make sure you understand what you're paying
for the privilege. "I wouldn't pay any more than 50 basis points (a basis
point is one-hundredth of 1 percent)," says Robert J. Adler, president of
XTF, a Chicago investment company that manages assets for high-net-worth clients.
Morningstar.com points to mutual funds sold by Fidelity, Vanguard,
USAA and TIAA-CREF as being particularly low-cost, but these funds have plenty
of competition. | | --
Updated: Dec. 29, 2006 | | 
