by Silicon Valley Blogger on 2007-12-04 21

Where should you put your cash? Should you consider online bank accounts, high yield savings account options or other cash alternatives?

Given the current economic environment, Ive recently discovered a few interesting places to put my cash, including a combo free checking and high yield savings account. Take a look at some of the following high interest accounts available right now:

Checking and High Yield Savings Accounts

• The EverBank Yield Pledge Money Market Account offers .91% APY for the first 3 months after an account is opened, followed by .91% APY for the first year; it has no fees but has a minimum initial deposit requirement of $1,500.

Looks good? Id say so, but lets delve into some of the deeper matters that may interest you about the savings you want to keep protected.

I didnt expect to see the day when Id question where weve been keeping our cash. For almost two decades, its been sitting in a money market mutual fund (MMF) in an investment institution, growing at a snails pace. Well, the last couple of weeks, my spouse has been anxious about some stuff hes read at Calculated Risk (one of his favored blogs) and other housing gloom-and-doom type blogs he seems to be addicted to. On top of that, these days, the news in The Economist is making him edgy.

The Risks of Money Market Funds

#1 Breaking The Buck

He alerted me to the concern in the financial arena about money market funds possibly breaking the buck. Money market fund shares are valued at $1 a share and are deemed very stable. But not all such funds are alike. There are those that may have invested in riskier paper to gain higher yields. And we all know what happens when a fund invests in something risky theres a chance that a stable value funds share price falls below a dollar.

Since summer, problems have cropped up in several large money-market funds, showing that to achieve higher returns and attract more customers, some money-market managers may have been investing in riskier holdings.

Earlier this month, Wachovia Corp. of Charlotte, N.C. disclosed a $40 million loss tied to money-market funds at its Evergreen Investments unit in Boston. Evergreens largest money-market fund holds a stake in at least one of what are known as structured investment vehicles, or SIVs, complex financial instruments that have become difficult to trade as credit problems have spread throughout the economy since the summer.

In all likelihood, big funds such as Vanguard, Fidelity and the like will not be affected. They have the resources to bail out any such losses experienced by their cash funds. It is within their interest to do so if there is threat of loss, since they would otherwise risk the possibility of panic selling by investors from these accounts. But this does not change the fact that losses are already occurring throughout the financial world:

Bank of America said yesterday that it would provide as much as $600 million to prop up several Columbia Management funds, which bought large amounts of debt issued by structured investment vehicles, or SIVs, that is now worth less than it paid.

Credit Suisse said it had booked about $125 million in unrealized losses after it bought notes issued by collateralized debt obligations and SIVs in its money market fund. The Wachovia Corporation said it had made a similar pre-emptive strike, recording a $40 million loss to buy distressed notes from its Evergreen money market fund. Legg Mason, SEI Investments and Sun Trust Banks have each secured letters of credit suggesting that they might be willing to lose money before investors in their cash funds do.

#2 Freezing Fund Withdrawals

One more thing: what about that Calculated Risk story that worried my spouse so much? Its about a government money market fund that froze its fund withdrawals to prevent mass redemptions. You see, even if a fund is able to solidly maintain its share price, it doesnt stop nervous account holders from abandoning the fund en masse, which would pose an equally big risk to the funds stability.

So my spouse has decided to be proactive and has suggested that we move our emergency money (i.e. cash) out of their non-Treasury based MMF accounts and into something safer. In considering this decision, weve decided to go about it logically. If youre facing the same dilemma, here are some steps you could take:

How To Decide Where To Put Your Cash Today

#1 List your cash accounts.

If youve got one such account, then this is easy. But its a good idea to make sure you know where all your money is, especially if you tend to be a fund or account collector.

#2 Find out where your money is invested in.

Time to review the prospectus to understand the investments in your fund. If there are any structured investment vehicles or mortgage-backed securities in it, flag those accounts for possible redemption unless you want to take the risk of value instability in these accounts.

#3 Know your primary goals for your cash.

You want pure safety? You want convenience? Or higher yield? In reality, we all want these features, but there are tradeoffs. Note that money market mutual funds are not FDIC insured.

#4 Review all options for your emergency fund.

You may decide that youre not taking any chances, and that the extra partial percentage point increase in money market fund yields is not worth any risk of principal loss whatsoever. Here are some ideas on where to park your emergency funds:

• Checking Account
• Certificate of Deposit
• Money Market Deposit Account
• High Yield Savings Account
• Money Market Mutual Fund
• Under The Mattress

Looking at these options, wed immediately eliminate checking account from the list since the money isnt going to be used to pay bills. CDs are also out of the question since an emergency fund needs to be in a liquid location and should be easily accessible, not stuck in something you cant redeem suddenly without penalty, such as a time deposit. And I wasnt being entirely facetious with under the mattress, though majority of your money should be elsewhere.

I personally prefer high yield savings accounts and money market funds, which are great choices if youre after solid and stable returns over time as well as liquidity.

#5 Evaluate your financial institution.

If youre happy with your bank or financial institution and you trust that they wont be folding anytime soon, you may decide to keep your money in an account with them which passes your litmus test for safety, convenience and expected returns. In my case, Im looking for MMFs that are backed by US Treasuries or US government obligations. If your money isnt with them already, you may also want to consider going with the big guys (Vanguard, T. Rowe Price, Fidelity, etc). They have the resources to cover any defaults that may be experienced by the underlying investments in their funds.

-ooOoo-

So what are we doing? Whatever cash we have well consolidate into one account in a big institution and make sure its in Treasuries. Especially since right now, this is what were living off at the moment .

Image Credit: AOL Money