How safe is your cash?

One of oldest adages in investing is “no risk, no return.” These days, that old saying seems literally true, since cash is considered the safest asset, yet it earns virtually no interest. However, in this article we'll examine whether cash is as safe as is sounds. Then, we'll look for where to get the most bang for your bucks.

The Not-Quite-so-New FDIC Limits

The first place, and perhaps the safest place, people turn to keep their cash is a bank to take advantage of FDIC insurance. The insured limit was raised from $100,000 to $250,000 during the financial crisis of 2008, and the increase was made permanent in 2010 by the Dodd-Frank bill. Additionally, through 2012, all non-interest-bearing accounts have unlimited coverage.

The limits apply to each “ownership category,” which includes single accounts, joint accounts, certain retirement accounts, and trusts, among others. So, you could have a single account in your name that is insured up to $250,000, your spouse could have a separate single account insured up to $250,000, and you both could have a joint account that has an additional $250,000 of coverage, for a total of $750,000 insured deposits (just in case you find a LOT of change in your sofa). Also, you get a whole new set of limits if you go to another bank — but it has to be a completely different bank, not just a different branch of the same bank. Use the Electronic Deposit Insurance Estimator (EDIE) at FDIC.gov to determine how much of your cash is covered.

Deposits at credit unions have nearly identical coverage through the National Credit Union Association. You can use the e-calculator at NCUA.gov to determine how much of your deposits are insured. Both FDIC and NCUA insurance are backed by the full faith and credit of Uncle Sam. That doesn't feel as safe as it used to, but the reality is that it's about as safe as you'll find in this world. Just make sure that your bank or credit union really is insured, which you can confirm at FDIC.gov and NCUA.gov.

The insurance extends to what are generally considered cash equivalents, such as checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. The insurance does not cover investments such as stocks or bonds, nor does it cover money market funds, which are very different from money market accounts. What's the difference? We're glad you asked.

What's in a Money Market Fund?

A money market deposit account is essentially a savings account at a bank or credit union that allows for a limited number of checks to be written to third parties. A money market fund is a mutual fund run by a financial services firm, and it invests in short-term debt (with maturities of a year or less) from governments and corporations. Like every other mutual fund, there is no government guarantee behind a money market fund. However, every fund strives keep its net asset value at $1. There have been only two instances of funds “breaking the buck”: one in 1994 and one in 2008. Investors in these funds lost 2% to 8% of their principal.

Chances are, the cash in your brokerage account or IRA is in a money market fund. To see what's actually in the fund, you'll need to visit the website of the company that sponsors the fund. (Fund information providers such as Morningstar typically don't provide analysis of money market funds.) As an example, let's peer inside a fund from Fidelity, the largest provider of money market funds for retail investors. Almost half of the Fidelity Cash Reserves Fund (FDRXX) is in certificates of deposit, almost 12% in Treasuries or government agency debt, and more than 17% is in short-term debt (known as “commercial paper”) from financial companies. On average, the debt in the fund matures in 56 days.

What many investors might find surprising is that most money market funds have exposure to European debt, though funds have reduced their exposure from 30% at the end of May to 10% by the end of December, according to the Fitch rating service. Meanwhile, they've been increasing their holdings of U.S. government debt and repurchase agreements (a.k.a., “repos”), which are a form of secured lending and, thus, theoretically safer bets.

But as the name implies, repos include an agreement by which the seller agrees to buy back the security at a later date, at a certain price. If the seller can't honor the agreement, the buyer — in this case, the money market fund — is stuck with the debt instrument at whatever the price the market is willing to pay for it. The Fidelity Cash Reserves Fund has almost 20% of its assets in repos. The T. Rowe Price U.S. Treasury Money Fund (PRTXX), which you'd think — given the name — is invested just in U.S. Treasuries, actually has more than a third of its assets in repos. The fund's fifth-biggest holding is debt from General Electric.

As long as the global economy functions in a somewhat normal (albeit slow) manner, money market funds are very safe. However, if there was another “black swan” event such as we experienced in 2008, it would not be a surprise if a few more money market funds “break the buck.”

Where to Turn

We don't want to overstate the risks of money market funds; the vast majority will maintain a $1 NAV. However, given their low yields — the Fidelity Cash Reserves Fund yields a whopping 0.02% — there are few compelling reasons to say with a money market fund, especially if you don't need the money in the near term. Financial planner and columnist Allan Roth has written about choosing higher-yielding, longer-term CDs. Even if you have to pay a penalty for getting your money back early, it's worth getting the extra yield, as long as you can leave the money alone for approximately two years (depending on the yield and early withdrawal penalty). To find the best rates, check out the GRS CD rate finder, which monitors more than 200 banks and displays the 50 highest rates. There's no reason to get virtually no yield from a money market fund, when you can get 1% to 2% or higher from a CD that enjoys FDIC or NCUA insurance. That's the kind of risk-reward proposition we like most.

Where do you keep your cash? Know of any banks or credit unions offering particularly good rates? Let us know in the comments.

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Lauren {Adventures in Flip Flops}
Lauren {Adventures in Flip Flops}
8 years ago

Well, I don’t have nearly enough money for a CD (gah), but I will say that I have an excellent rate for my savings account at Wells Fargo (3%). I realize it doesn’t work the same way as a CD, but I’m pretty pleased with the interest.

Heidi
Heidi
8 years ago

How did you swing a 3% interest rate at Wells Fargo?

FC
FC
8 years ago

FYI, I don’t see wells fargo rates coming anywhere close to 3%.

SB @ One cent at a time
SB @ One cent at a time
8 years ago

Lauren are you sure its 3%? No matter how hard I try, cant find anywhere its more than 1.5% for saving rate, excluding local credit unions, not on internet. Would you tell me please, will immediately transfer all my money there.

Lauren {Adventures in Flip Flops}
Lauren {Adventures in Flip Flops}
8 years ago

I’m sure! I kind of stumbled upon it one day when I went into a branch to sort something out and it was a special they ran for people with my type of checking. I have to transfer money every month to get the interest rate. Also, it’s 3% now, and when it began, but the interest varies between 1.25% and 3% depending (usually hovers around 2ish).

Marianne
Marianne
8 years ago

3% is amazing! This must be directly related to the, geez I dunno, 17% they were charging me on a loan way back when… 🙂

sarah
sarah
8 years ago

For people who don’t trust the government to “bail out” your bank or credit union (as you alluded to), it’s typically not the government itself that pays up, all credit unions pay into an insurance fund (CUNA) that pays out when a credit union goes down. Probably works the same for banks. If the insurance fund was bankrupted, I suppose that’s when the government would have to step in.

I Am 1 Percent
I Am 1 Percent
8 years ago

My wife and I bring in a signifant income, but we don’t keep a whole lot in cash..just enough for an emergency.

That said, we don’t have more than $250k sitting in cash. But what we do have in cash sits in Discover Bank currently yielding 0.90%…not much, but its something.

Reuth
Reuth
8 years ago
Reply to  I Am 1 Percent

On what planet is a quarter of a million dollars not “a whole lot” in cash?? I don’t see how this response is anything but trolling or an excuse to brag. “Just enough for an emergency.” Give me–give us all–a break from repeatedly coming here to show off. Please.

Audrey
Audrey
8 years ago
Reply to  Reuth

If you had read the article, you would know that any one account is only insured up to 250K. The comment said they don’t have that, so it’s not really a problem. Perhaps you should reread things before flipping out on someone for no reason.

Kris
Kris
8 years ago

My wife and leave our main savings in online savings accounts. However, I recently saw a reference to a website called Lendingclub.com. The premise of the site is there are borrowers and lenders. The lenders can pick and choose which borrowers they want to loan money too and as the borrowers pay the money back the lenders get their principal and interest back. They state the key to making money is diversifying your loans. They also boast some pretty significant returns on your money. I’m skeptical because it’s essentially unsecured loans so there is no real recourse to recoup your… Read more »

BdoubleU
BdoubleU
8 years ago
Reply to  Kris

I have been using Lending Club for ~ 3 years now. I have about $2500 “invested,” and have had two loans default (for a total of $150), and my net interest is just under 6%. That 6% includes all the lost principle from the two defaulted loans. I’ve now learned my lesson and invest no more than $25 (the minimum) in each loan, since I had $125 invested in one of the two that defaulted. I’m okay with these results (though not happy to have people default on loans I’ve provided money for), as only 2 of my 100 loans… Read more »

Einstein
Einstein
8 years ago

I think we’re on the upswing so far as bank failures. Even so, I wouldn’t ever store more than $250,000 in a single account.

Also, thanks for covering money market accounts in a way that most haven’t. Despite the public outcry over money market exposure to Europe, the situation is hardly as bad as it was several months ago.

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago

With so many countries nearing default, I don’t feel like my money is safe anywhere. At one point, tech stocks were safe. Then mortgage-backed securities were safe. Could it be now that US debt is safe? (It’s not).

This article is great. Thanks for explaining money market funds and accounts. It’s always good to know where your money is and how it’s being handled. What I got from the article is that no money is “safe.” Do your own research by finding the time to do it. It’s worth it.

Dogs or Dollars
Dogs or Dollars
8 years ago

I have a pretty large stash of cash sitting with ING. I’ve been meaning to break it into smaller chunks and do a CD ladder. Should make me about half a percent more in interest.

As of yesterday though, Im intrigued with the idea of Treasury I Bonds. If I’m going to lock the money in for a few years anyway, I might as well at least beat inflation.

chris
chris
8 years ago

I used to keep the majority of my cash in ING, but given the lower rates they have now (and they have been regularly decreasing those rates every month or so the past fall). I have moved all my cash to a local credit union – it has comparable low rates. Given the current unstable state of the economy and the world, this would allow me quick access to it. With ING, there is that three-day transfer wait, which might be just too late, if something bad should occur with the economy.

PFM
PFM
8 years ago

I’ve used ING for years, current APY is .80, I’ve seen some teaser rates but nothing to make me switch. Now that Capital One has bought ING I’ll keep a close eye on any changes they make.

Soto
Soto
8 years ago
Reply to  PFM

Capital One High Yield Checking is at 1%. They promise 5x the national average for a year. At least in NJ.
I made more $$ in the last month in interest than YEARS at Chase and Valley.
Min is $5k avg but it’s a regular checking account. It’s great to finally break the .01% barrier!

Laura+Vanderkam
Laura+Vanderkam
8 years ago

Interest rates in many of these accounts are lower than inflation. Fun to see your money basically losing value as it’s sitting there…

Paul in cAshburn
Paul in cAshburn
8 years ago

So here’s what I don’t get: 1. Inflation is caused by the Fed increasing the quantity of money (direct purchases of bonds with “created” money, or quantitative easing). 2. You pay taxes on capital gains in your investments – even though much of the gain is due to inflation. 3. So the Government (please don’t start in about the Fed not being Government) causes inflation, and then taxes you on the gains they caused by inflating the dollar? 4. And the Fed artificially keeps interest rates low to try and force savers into higher-risk investments – but when those higher-risk… Read more »

Mark
Mark
8 years ago

If you are worried about inflation then go buy into real estate, commodities, or stocks. All of those increase with inflation, but obviously they have their own risks.

Gold is already inflated, so I wouldn’t go there, pick some other commodity that isn’t swanmped with panicky buyers.

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago

Paul, that’s a great comment. Very well put, in fact that’s the best comment I’ve seen regarding the fed, anywhere. Quite simply, the Fed shouldn’t exist. The market should dictate the price of money. What’s more of a fair price for money than that which someone is willing to pay?

Mark, real estate is also artificially propped up by the government/Fed. Not allowing foreclosures, first-time home buyer incentives, etc. create artificial demand. I like commodities though, especially gold, as it will be the new medium of exchange for the fruits of production soon enough

Ryan
Ryan
8 years ago

Local credit unions… reward checking yielding 2.5 to 3%you spy. Only emergency cash though – extra cash is invested in a variety of things (have to beat inflation).

Mark
Mark
8 years ago
Reply to  Ryan

2.5% looked pretty attractive to me too, but then I saw that I make about $250/yr from credit card rewards (Chase’s 1.1% cash back plus 10 points per transaction). That’s about how much the credit union would give me with the max balance of $10,000. So for my situation, it comes out about the same, but the credit card rewards is more flexible.

Peter
Peter
8 years ago

I am 24. I typically hold no cash reserves – just enough in my checking account to get me through the month. All non-401k savings go directly into index funds in my trading account. Many people may balk at this, but I can liquidate index/ETFS in a few days in the event of an emergency. That’s right, my trading account also functions as my emergency fund. The only negative scenario I can see is when I must sell stock due to a cash flow emergency AND the market is significantly down. But that’s a risk I’m willing to take; I… Read more »

partgypsy
partgypsy
8 years ago
Reply to  Peter

yes, because that never happens…

El Nerdo
El Nerdo
8 years ago
Reply to  partgypsy

What’s the big deal. THe Dow Jones is up 6% from last year. Say you sell at a loss, take 1% to sell quickly, you still up 5%, minus fees and taxes and all that you’re still higher than 1%.

CreditSense-CreditRecovery
CreditSense-CreditRecovery
8 years ago

Great insight into the money market accounts. Highlighting the European connection is quite important.

contrarian
contrarian
8 years ago

I would be very interested in hearing from the GRS subscribers if they know of any safe alternatives to keeping your cash inside the “system” with the usual suspects like, banks, credit unions, and brokers? The MF Global debacle, where 1.2 billion in customer money went missing (was stolen and not returned to customers) from supposedly legally protected segregated brokerage accounts, is proof positive that our money is not safe with the brokers. The agency tasked with protecting customers funds (SPIC) did not fulfill it’s obligation to protect those customer funds. MF Global is the proverbial canary in the coal… Read more »

chris
chris
8 years ago
Reply to  contrarian

Get a home safe – a very large one. Many people rely on these. What with interest rates so low, it is no big deal to keep a stock of cash on hand and many do. As stated above, a quick lock down on the system would make it impossible to get hands on your cash. Additionally, look to foreign countries where they are limiting the maximum amount of transactions to keep tabs on what people do. Cash and barter – leave as little trail of yourself as possible.

El Nerdo
El Nerdo
8 years ago
Reply to  contrarian

Canned tuna, bullets, olive oil is how I will survive the zombie apocalypse. And a vegetable garden if I can swing it. 😀

Elizabeth (so many Elizabeth's)
Elizabeth (so many Elizabeth's)
8 years ago
Reply to  El Nerdo

Have you played Plants vs. Zombies? Those plants are ruthless!

Edward
Edward
8 years ago

If my grandfather bought gold instead of investments, he would have retired a millionaire. If my father bought gold instead of investments, he too would have retired a millionaire. …I must be stupid not to own the shiny stuff. 🙁

AverageJoe
AverageJoe
8 years ago

A nice risk/reward post. I’m with you: right now the ends don’t justify the means.

PennySaved
PennySaved
8 years ago

I have some of my cash in two rewards checking accounts, both started out at about 4% interest but over time dropped to 2%. I get the high rate up to $25,000 deposited per account. One account is at First Bank and Trust in Sioux Falls, SD. At the time I was able to get a checking account there even thought I did not live in the state. I think they changed that now. The other account is with NARFE Premier Federal Credit Union in Annandale, VA. NARFE is National Active and Retired Federal Employees Association. For these checking rewards… Read more »

Carl Lassegue
Carl Lassegue
8 years ago

Great post! It makes so much more sense to put your money in a CD!

Jenna, Adaptu Community Manager
Jenna, Adaptu Community Manager
8 years ago

I just keep my cash at my credit union. Nothing too fancy there.

Paul
Paul
8 years ago

What do you think about putting some money into a microloan program such as Kiva where you earn better interest rates and they reclaim a repayment rate of 98.91%?

El Nerdo
El Nerdo
8 years ago
Reply to  Paul

Cash is 100% liquid, but I’d guess Kiva isn’t, is it? “Scuse me Mr. Goat Shepherd, I have an emergency and I need to collect on that loan today,” says you.”But I haven’t taken my goats to market yet,” says he, “I need another three months.” “Dang! That ransom isn’t going to pay itself!” says Napoleon Dynamite.

Paul
Paul
8 years ago
Reply to  El Nerdo

Foiled again. I started to read the article but got sidetracked by the horrific interest rates. I think I’d rather have a the goat herder making use of the cash than it sitting there collecting dust 🙂

El Nerdo
El Nerdo
8 years ago

So, Robert, my summary of your article is that long-term CDs are safer than other kinds of cash while offering some protection against inflation, yes? (Unless we’re having deflation at the moment– I doubt it, judging by the price of food). How do you know this is a good place to park your money without taking into account inflation in the next 2 years? I guess my question is– why would somebody who is trying to get “rich” slowly want to have 1/4 million dollars in savings, right now? Wouldn’t my 1/4 million dollar be working harder with little difference… Read more »

PR
PR
8 years ago

A joint account would have $500k of FDIC insurance, not the $250k stated in the article. The total coverage under the scenario would be $1M, not $750k.

Joe
Joe
8 years ago

In Canada, the CDIC (equivalent of American FDIC) only offers $100,000 coverage on each registered account. Probably because each of our “Big 6 Banks” is “too big to fail”. The collapse of just one of those banks would bankrupt the CDIC. What a terribly ineffective socialist program.

Kenny
Kenny
8 years ago

We keep our money spread amongst various institutions that are FDIC insured. AMEX Savings, Sallie Mae, ING, HSBC and Fidelity. Out of all them, Fidelity is the only one that has money which is not FDIC insured, but SIPC insured. In short, kept max of $250K per bank account (if single name) or $500K if joint name since the insurance is per SSN. Even then, spread it out. MF Global is a different issue and a non-FDIC insurance problem. Banks that were offering special high (unusual) rates have all gone bankrupt, and more to come. The rate of bankruptcies have… Read more »

Julie @ Freedom 48
Julie @ Freedom 48
8 years ago

We’ve got our cash in 3 separate bank account… at 3 separate banks. His, mine and ours. That being said – the vast majority of it is invested in stocks, mutual funds, bonds and real estate. We’re quite young and willing to take a bit of a risk, but as we grow older we’ll start buying more safe investments.
So many options! aaahhh!

Drew C.
Drew C.
8 years ago

The money in Europe scares me a tad. However, money in a money market fund is extremely safe I believe

Peter
Peter
8 years ago

I leave my cash in a FDIC-insured, high-yield checking account, which offers 4% APY so long as I make the required number of debits per month with my check card. There are a number of banks (mostly small credit unions) around the country offering similar rates or higher. Some are available only to local residents, or require a branch visit to open an account, but others are available nationwide and can be opened online or over the phone. To find one in your area, check out depositaccounts.com, and look under checking accounts > reward checking. That site does an excellent… Read more »

Jackowick
Jackowick
8 years ago

I love reading the distrust issues and people who think we are on the precipice of the apocalypse. If you are over the age of 25 or just, you know, read history, we have teterred numerous times and always come through. Oh, and let’s not wallow/brag about the “Great Recession” and even TRY to compare it to the GREAT DEPRESSION. Love them or hate them, our current system used tremendous measures we’ve built up over the years to slow and stop the recession. Which is now over, by the way, if you read economics. That said, I have no problem… Read more »

contrarian
contrarian
8 years ago
Reply to  Jackowick

Jackowick – your comments show you have an excellent grasp on the last 30yrs of US history, but no recollection whatsoever of economic or historical events beyond that. Call it “distrust issues” if you will, but a 15.5 trillion dollar national debt and 80 trillion in unfunded liabilities could lead us to an ugly 1-in-50 or 1-in-100-year economic event. It’s painfully naive and frankly, shows a shocking level of hubris to dismiss out of hand the possibility of deflationary depression similar to what Japan has been mired in for the last 20yrs, or the US experienced in the 1930s. In… Read more »

APB News
APB News
8 years ago

My grandfather always used several banks to ensure all his money was FDIC insured. I do the same thing just to make sure I always have access to some funds no matter what happens with a specific bank.

Daisy

Jason Spencer
Jason Spencer
8 years ago

I believe the stock market is becoming one of the only ways to really stay ahead of inflation in this economy. It doesn’t have to be risky or complicated to invest either. If you have a group of solid companies with high dividend yields, you can do quite well with little risk.

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