3 Safe Harbors for Your Cash

Updated on Oct. 10, 2008.

When banks as mammoth as Wachovia (WB) and Washington Mutual are melting down practically every other day, it seems like the only sensible money move is to buy a shovel and some mason jars. Equities have been a volatile and losing proposition for months, and even conservative plays like boring old bonds are blowing up. Just ask WaMu or Lehman creditors.

With short-term interest rates hugging the ground at just 1.5%, it was already tough enough to find a safe haven for your cash that offered any kind of inflation-beating return. The latest insanity has investors streaming into Treasurys like dazed refugees from a war zone, pushing yields down to negative-return territory. Indeed, the yield on a two-year Treasury note recently stood at 1.55%.

It's all rather discouraging, but don't go burying your nest egg in the back yard just yet. There are still places where you can get some return on your principal without having to worry about the return of your principal.

Banks, eager to beef up deposits and shore up balance sheets, are offering higher yields to attract CD shoppers. The average overnight rate on a one-year CD stands at 3.63%, according to Bankrate.com, and climbs to 4.06% for a five-year commitment.

True, you forgo some liquidity with CDs, since you'll pay a penalty if you tap your cash before the term expires. But the tradeoff is safety -- just make sure your CD is backed by the FDIC. (To ensure all your accounts are within FDIC limits, use the agency's Electronic Deposit Insurance Estimator.)

Of course nothing beats a savings account for liquidity and safety. Decent yields don't hurt either. HSBC (HBC) offers an FDIC-backed online savings account throwing off a 3.25% annual percentage yield with a minimum initial deposit of just $1. Topping the charts, according to Crane Data, is Capital One (COF), which boasts an online saving account with a 3.55% APY -- but be forewarned there's a $10,000 balance minimum.

And don't forget to use your online savings account to pay your bills electronically. The less you're forced to rely on checks the better, since the average national overnight rate on interest checking is a paltry 1.56%, according to Bankrate.com.

Money-market mutual funds gave us one of the worst scares of all time when the Reserve Primary Fund did the unthinkable and broke the buck. (Thanks a lot, Lehman.) Suddenly these funds, which were supposed to be as safe and solid as cash, were simply and quite unbelievably not.

In a matter of days $133 billion flew out of money-market mutual funds, which collectively hold about $3.34 trillion. It was truly a money-in-the-mattress moment.

The Treasury Department managed to stanch the bleeding with an emergency insurance program. While the federal backing only covers money on deposit as of Sept. 19 and only if fund companies choose to enroll in the program, liquidity and comparatively high yields make some money-market mutual funds an intriguing place to sideline cash. Calvert Social Investments Fund's (CSIXX) seven-day yield stands at 4.93%, according to Crane Data. USAA Money Market Fund (USAXX) offers 4.41%.