Where to Get Income These Days

I'm not at the stage of my life where I invest for income, but I do have some cash on the sidelines (emergency fund mostly) that I would like to be earning at least an acceptable amount while it's sitting there (I also need easy access to it "just in case".) If you've been looking for ways to earn anything close to a decent amount on the cash you have, you know how hard it can be to do so. Kiplinger tries to help us all out by naming their best bets for income in 2011 as follows:

To preserve capital. A good strategy is to invest in a fund that buys high-quality debt with short maturities. For example, the price of Vanguard Short-Term Investment-Grade (symbol VFSTX) should fall only 2% if interest rates rise one percentage point. In the meantime, you get a 1.7% yield.

For high income. The two categories that offer the best yields -- junk bonds and emerging-markets debt -- have seen big run-ups in prices (and accompanying declines in yields). It's hard to argue that either area is undervalued. If you want to put a small amount of your bond money into junk, consider T. Rowe Price High Yield (PRHYX). A consistent performer, it yields 6.4%. Likewise, don't go overboard on emerging-markets bonds. As the condition of developing nations continues to improve, rating agencies are likely to upgrade their assessments. But the bonds are still risky. A top choice is Fidelity New Markets Income (FNMIX), which yields 4.5%.

To diversify. You want a fair yield, but you don't care about short-term changes in principal as long as you don't suffer permanent losses. One idea is to build a ladder of Treasuries maturing in one, two, three, four and five years. Then add a diversified fund, such as Dodge & Cox Income (DODIX). It has an average maturity of seven years and a yield of 3.6%.

The piece also notes that bonds don't offer much of a solution this year.

Ugh. All this effort (finding the right option, managing it, etc.) for a few measly percent. Ugh again.

Anyway, here's what I've done to try and make my money work for me while it's in cash:

• I've taken advantage of a promotional offer at a local bank -- three-year CD yielding 3%. Not setting the world on fire, but not bad either. If they run the promotion again I plan on buying another CD and laddering them as time goes on.
• A couple years ago friends of ours put us in touch with a local businessman who needed cash but couldn't get it because the banks had dried up almost all lending. (I talked a bit about this in One Reason the Rich Get Richer.) I invested some cash with him at very good rates (6% for two-year investments, 8% for three-year investments, 9% for four-year investments, and 10% for five-year investments.) Now I have not yet received any money back (I'm soon to do so though), so there is some risk still hanging out there (I do know the businessman both personally and professionally, so it wasn't like I was going in blind). But if these pay off, they where very good investments indeed!!
• I've been looking at high-interest-bearing checking accounts as a place to keep some cash. These accounts usually pay 3% or so but in addition to putting the money in the bank, you also need to jump through some hoops to get paid that amount (most common are having direct deposit, using their debit card so many times per month, and getting online statements.) I haven't found any good options locally that allow you to earn the top rate on more than $2,500 in the account, which makes it hardly worth the effort. I've been looking around on the web too, but haven't found anything I'm ready to jump on.

Other than these options, I'm at a loss. Perhaps I should put some in the Vanguard Short-Term Investment-Grade fund mentioned above, but it seems to me that interest rates are bound to go up sooner rather than later and then I would get killed on the value of the fund.

How about you? Where are you parking your emergency fund (and other) cash this year?

Comments

[KH]

Last year I parked as much emergency money as I could into a guaranteed investment option of the "side fund" of my life insurance. It offers a guaranteed 4 %, it's liquid, and it's tax-deferred. Of course it's not FDIC insured. Also, you can only put in a limited amount ($30-40K) per year.

[Matt]

I really like vanguard short term investment grade.

I also like vanguard welesley income fund. Welesley has some stock mix in there so it is not the type of funds you are looking for.

[jbrown]

I dislike CDs. I'd rather have my money tied up in real investments or earn less.
I used to keep a lot of my money in short term investments for emergency but personally I'd rather invest heavier in mutual funds and take the risk of my emergency be when the market is down.
I guess the point in diversification I would sell the winners in my portfolio during an emergency first

[Eli]

My EF is at Ally (opened when rates were much higher.) Thinking about Bank Direct, where you get American Airlines miles based on the balance each month, but I haven't researched fully yet. If an award ticket costs more than the interest I earn in a year at Ally, seems something worth looking into. Anyone have any experience with this?

[Andrew]

I get 3.1% for balances up to $25k on my primary checking account. Yes, you have to meet certain requirements, i.e. debit card use, direct deposit. But I know that I would meet the requirements anyways.

[texashaze]

Hey FMF - Aren't you too young to be focusing on conservative asset protection like CDs?? Last year was a good year for investing if you took any risk.

[NoTrustFund]

I'm using ING Direct. The yield is 1.1% on everything and 1.2% APY on balances ofer $50k which isn't great, but I'm not worried about losing principal. I'd much rather have 1.1% risk free that 1.7% with risk. Especially since we have our emergency fund and down payment money in this fund.

[Money Reasons]

Hmmm, interesting! I've never played around with junk bonds yet! T. Rowe Price High Yield (PRHYX) sounds like it might be fun with a small amount of money in it!

I've been laxed with my cash to date, so it's just been sitting in low interest rate bearing accounts. But this may change soon...

[Tyler]

"(symbol VFSTX) should fall only 2% if interest rates rise one percentage point. In the meantime, you get a 1.7% yield."

So let me get this straight you are going to risk 2% to earn 1.7%?

"high-quality debt with short maturities"

Cant disagree with this- the key is short maturities. Just remember auction rate securities were in this category two years ago.

No one is ever too young to focus on capital preservation. Rule #1 is always "dont lose money"

Jbrown- Most emergencies occur when your assets are down. Its rare that you have a financial emergency when the market is at all time highs and liquidity is high.

[Speed Weasel]

Alliant Credit Union (have to join a PTA, local school's, state, or national to be a member, but not a hard or costly membership) yielding 1.1% currently.

Ally yielding 1.09% currently.

INGDirect yielding 1.1% currently.

None of these is great, but you can sleep at night! Versus the worry for 1.7% or the hassle of laddering? For an account where the main objectives are Capital Preservation and Access?

The rates are insulting, but you have to stick to the master plan!

[Derek Clark]

I go with the 1.1% at INGDirect. It's simple, easy, and the other options don't seem to be worth the risk or the hassle.

[Claire]

Plus if you open that ING account through costco you get and extra bonus - $50, I think. I, of course, knew about it and forgot to open my account that way.

[DCS]

I don't have an account there, but I believe Lake Michigan Credit Union is (or at least was) paying 4% on balances into the 5 figures ($15,000 if I remember correctly). I don't make enough debit card transactions to qualify, but a family of four might be able to do it - I think the minimum was 10 or 12 debit transactions per month. It's not FDIC insured being a credit union, but I think they have some kind of deposit insurance.

[FMF]

texashaze --

My investments are in stocks or bonds. This is for emergency fund purposes mostly.

[jim]

I don't know why they even bother mentioning that vanguard short term fund. 1.7% is nothing to brag about or take any extra risk for.

I don't think I'd loan friends or acquaintances money even for 6-10% return. I hope that works out for FMF. But I'd be too worried they'd default and I'd lose my money and it would burn a friendship. If the banks won't loan someone money then thats a good enough reason for me not to risk my cash.

[FMF]

jim --

Just got my first 1/4 back with 7% interest (per year for two years.) Sweet!

[Rockbell]

I have become the mortgage holder for both my kids. Both they and I are getting a good deal!

[Tyler]

DCS- Credit Union deposits are insured by the NCUA up to 250k. The 4% is very high by the way so Id look into it a bit more.

[texashaze]

@Rockbell - that is a great strategy. I have a lot of friends from immigrant families and this is such a prevalent practice that it's the norm -- especially my friends from Asia. They never go to a bank. The bank is family and extended family. They pay rates better than the market and without the red tape. There is a very high social pressure on the family name that defaults are rare.

@FMF - this would be an interesting topic for you to explore.

[KMI]

I have my immediate emergency account (the first month of expenses) at Ing where I can get it quickly with my other accounts.

It's not huge, but a slight improvement of rates over that is using GEInterestPlus. It's essentially an investment in GE bonds, so it's not FDIC insured - but at the same time it's pretty safe. It acts like a money market account (check writing, electronic transfers, etc.) but has rates that guarantee to beat regular money market accounts. I keep a few months of expenses here since I haven't figured out a better place that doesn't add a lot more complexity with tracking accounts at more banks, jumping through hoops, and so on.

FMF, how does it work to have your emergency fund loaned to your friend? Or is this not the emergency fund, but rather cash that isn't invested elsewhere?

[FMF]

KMI --

Let's say it's a semi-liguid emergency fund. Though with the return rates, it performs more like a stock.

[jim]

FMF - Glad to hear you got your payment.

[Jay@MarketFolly]

Look into floating rate funds, a.k.a. bank loans. Tons of mutual fund options for this. Typically higher yields paid, short term duration, and not affected hardly as much when Fed eventually starts to raise interest rates.

Jay
@MarketFolly

[W A G]

Don't bet the farm on these but if you have some fun money laying around check out Phillip Morris (MO} and Fidelity New Markets Income (FNMIX). I have had them working for me for many years of good average returns. Nice check every 90 days from MO and monthly from FNMIX in both up and down markets.

[Moneycone]

If lending money to others appeals to you, you should consider peer lending networks like prosper.

[Old Limey]

@Jay
A floating rate income fund that I like is SAMBX, its dividend yield over the last 12 months has been 6%.
Its Total return, last 12 months was 9.54%, worst drawdown was -3.38%.
Its Total return, since 5/25/10 was 14.9%, worst drawdown was -0.67%.
Its expense ratio is 0.53% and at Fidelity it has a $75 transaction fee to buy, $0 to sell.
Minimum purchase is $2,500.

[Old Limey]

An Ultra Short Term Bond fund that I like is MWUSX, its dividend yield over the last 12 months has been 3%.
Its Total return, last 12 months was 9.54%, worst drawdown was -1.93%.
Its Total return, since 5/25/10 was 10.34% APR, worst drawdown was -0.25%.
Its expense ratio is also 0.53% and at Fidelity it has a $75 transaction fee to buy, $0 to sell.
Minimum purchase is $5,000.

[Old Limey]

@W A G
FNMIX has done well over the last 12 months, its return is very similar to MWUSX, MWLDX, and SAMBX, it is more volatile however and has a worst drawdown of 5.09% as well as a short term redemption fee of 1% for funds held less than 90 days, and an expense ratio of 1.00%.

[Crystal@BFS]

We pretty much zeroed out our emergency fund last July to pay off our last car loan (our jobs are secure) and have been building it back up in ING at 1.2% right now. We have less than $15,000 (4-5 months of living expenses) so I'm not killing myself to find a better rate yet. I think we may just keep it at or around $15,000 and use any extra to pay off our house faster since that 5.375% seems like a good return right now. If savings rates go back up, we'll start keeping more cash in our emergency fund. :-)

[Bruce]

6% in Australian bank accounts