Earn Close to 4% on Your Cash

Nervous investors can’t be blamed for pulling out of stocks and opting for the relative safety of the sock drawer (or the backyard, for that matter). But if you’d like a bit of yield with that peace of mind, there are some practically risk-free investments out there that will give you returns of up to 4%.

“Banks remain hungry for consumer deposits,” says Greg McBride, senior financial analyst at Bankrate.com. And, in turn, they're offering competitive yields on certificates of deposit (CDs), savings and money-market accounts. 

Considering that the Federal Reserve recently slashed the federal funds rate to a historic low -- from 1% to a range of between 0% and 0.25% -- banks are still offering fairly attractive rates, says McBride. (Banks usually adjust yields on short-term accounts like CDs and savings accounts to reflect the federal funds rate.) But these rates won't stick around forever.

The average rate on a one-year CD is 2.61%, while rates on money-market accounts average 2.06%, according to Bankrate.com. Of course, those rates aren’t as nice as the almost 4% consumers could have nabbed in late 2007, but those who shop around can land yields that are much higher than current averages (see table below). Just make sure to move quickly. “Yields are declining by the day,” says McBride.

When hunting for the best yields, make sure to follow these tips:

Look for Safety

“Vet everything,” says Troy Von Haefen, CFP and owner of Von Haefen Financial Management in Nashville, Tenn. Luckily for consumers, there are plenty of safeguards in place when it comes to deposit accounts. In October, the Federal Deposit Insurance Corp.  increased the amount it will insure in each depositor’s account to $250,000 from $100,000. “If the worst-case scenario happens, if the bank fails, FDIC protection is going to be there,” says Von Haefen.

For even more peace of mind, check Bankrate.com, which lists each financial institution’s safety rating. (All products listed on Bankrate.com are offered by banks that are FDIC-insured.)

Don’t Get Too Attached to Cash

CDs are certainly a safer alternative to riskier market bets, but don’t get too complacent, warns Karen Schaeffer, certified financial planner and president of Schaeffer Financial in Rockville, Md. “Cash is great for short-term money, for liquidity and for peace of mind, but long term it’s not good. It can’t keep pace with inflation,” she says.

She recommends a laddering approach. If you’re putting your cash in CDs, divide it into different maturity dates. Instead of sinking, say, $5,000 into a five-year CD, consider shorter-term maturities: Put $1,000 into a six-month CD, another $1,000 into a one-year CD, and so on. As each matures you can re-invest at the new rates. That way, you’re not locked into one maturity date – and therefore one interest rate. “You want to be able to take advantage of higher rates when they come later on,” says Schaeffer.

One caveat: Before locking your money into a CD, make sure that you won't need the funds anytime soon. If you take your money out before the CD matures, you'll have to pay an early-withdrawal penalty in the form of forfeited interest.

Shop Around

With banks angling for customers’ deposits, it pays to shop around for the best places to park your cash. The Internet makes it easy to check rates at banks of all sizes nationwide. Visit web sites like Bankrate.com and money-rates.com to compare rates and minimum deposit requirements.

Check out our tables below for a list of some of the best yields being offered on CDs, savings and money market accounts.

Savings and Money-Market Accounts

CD Rates

* Savings accounts and money-market accounts have APYs that are variable and can change at any time.

Source: Bankrate.com and banks’ web sites. Rates as of Jan. 5, 2009.