Are you missing out on free money? - Your Life - taking advantage of interest rates - Brief Article

USA Today (Society for the Advancement of Education), May, 2002

Are you missing out on some free money? A study released by the Consumer Federation of America (CFA) found that Americans could be earning a lot more in interest on their cash without taking any, or little, additional risk.

The study, based on Federal Reserve data, claims that Americans hold more than one trillion dollars in low-yielding savings accounts and could earn another $30-50,000,000,000 in interest by shifting that cash into higher-earning alternatives such as money markets and certificates of deposit. What the report found especially surprising was that 70% of that trillion dollars was held by just seven percent of the households, with each of them stashing at least $25,000 or more in savings accounts.

Of course, most families want to and should have some cash in a savings account that they can easily get into. It's good for small emergencies or temporary holding of funds. It is not good, though, say many experts, for holding large amounts of cash for longer periods of time--not when you can find safe alternatives that pay interest rates two to three times higher. Even retirees who want to hold cash to help pay for retirement expenses may wish to consider these alternatives.

One of the problems that the CFA study pointed out was that 57% of those with savings accounts don't know the interest rate on the account. According to figures from Bank Rate Monitor, the passbook savings account rate in the largest cities in the U.S. average a meager 1.42%, with some major banks paying less than one percent. Thrift passbooks in these cities averaged 1.84%. It is possible to find passbook accounts around the country running closer to three percent, but even this rate remains below cash-equivalent alternatives. The following are some alternatives, what they pay, and why they may be a better choice for you:

Certificates of deposit. The study found that one-third of savings account holders thinks there is little difference between CD and passbook interest rates. In fact, according to Bank Rate Monitor, average a higher rate on an annual basis.

Even though the Federal government insures most certificates of deposit as they do bank savings accounts, some consumers prefer the accessibility of a passbook account to tying up their money in CDs. This may make sense for small amounts of money or money you know you'll need in a very short time, but it generally doesn't make sense to let large amounts of cash sit in a savings account if you won't need it soon. If you are concerned about access to the money, stick with shorter-term CDs with staggered maturities. Furthermore, you can still cash in a CD at any time without any risk of principal. At most, you'll lose several months' interest if you cash it in early.

Money market accounts and funds. The advantage of money markets is that you can get into them easily with no loss of interest, often by simply writing a check. Taxable mutual fund money market accounts, according to Bank Rate Monitor, average about twice the return of bank money market accounts. You can find higher rates, particularly among Internet banks, but just be sure they are Federally insured. Unlike bank money markets, money market mutual funds are not Federally insured. However, these funds generally invest in high-quality short-term corporate or government bond issues and have an excellent safety record.

Treasury bills. Like CDs, U.S. Treasury securities tie up your money for a set time. Treasuries are safe as long as you hold the securities to maturity, but, unlike a CD, you can lose principal if you have to cash in the security early and interest rates have risen since you bought it. Generally, you would want to buy only short-term Treasury bills, which run in maturities of three months, six months, or one year.