The People's Money

by Robert K. Heady
Bank Rate Monitor

       It's enough to make you sick. In the past year, the puny yields you earn on bank money market accounts and CDs have plunged anywhere from 25 to 50 percent while stock investors - even in an iffy, gloomy economy - have been making out like bandits.
       Today, according to bankrate.com, the average interest-bearing checking account yields a ridiculous 0.23 percent while the typical MMA pays only 1.26 percent.
       Yet, if you had put $10,000 into stocks last January, here's what would have happened to your money based on the major stock indexes:

• According to the latest Dow Jones industrial average, you would have earned $1,896 to date.
• Nasdaq composite investments would have resulted in a sensational $4,289 gain.
• Using the S&P 500 index, you would have earned $2,050.
• With the Russell 2000, you'd be $3,953 ahead, while with the Wilshire 5000 index your stock earnings would be $2,377.

       Will this topsy-turvy condition ever correct itself? Yes, it always does, but no one - not even the Federal Reserve - knows exactly when. The best guess, in my opinion, is that bank rates might begin a slow upward crawl sometime in late January or into February. I don't debate the age-old wisdom of keeping most of your hard-earned cash in stocks for the long haul, because, after all, stocks have returned an average of 10 percent a year over the past several decades.
       But where you're missing the boat is in keeping your money only in a nice, safe neighborhood bank that is paying you zilch when you could be nearly doubling your money in an out-of-state institution. It's only a phone call away, and probably also FDIC-insured for up to $100,000 per person including principal and interest. In fact, through something called a testamentary revocable trust, it's possible for a family of four to insure up to $1.4 million at the same institution.
       Let's face it: The nice old days of the early 1980s, when money markets paid 6 percent and five-year CDs were at 12 percent, are gone for now. You have to fight for every buck by locating the highest-yielding banks in the country that'll pay you more than you've been getting. So why not do it?
       Start by visiting bankrate.com's Web site and see who's paying what on CDs, and what the required opening deposits are. Make sure each bank you contact - ideally at least three - is FDIC-insured. (Yes, CDs through brokers also should be covered by FDIC.) Double-check on the rate and the yield, tell the institution how much you plan to invest and for how long, request a set of account-opening documents, and ask about all penalties and fees such as for early withdrawal. Also obtain a copy of their "fee disclosure" document.
       Top yields in the United States based on bankrate.com's latest survey are the following:

• Money market account - 2.21 percent yield from Bank of Internet USA, San Diego, CA. ($1,500 minimum);
• six-month CD - 1.84 percent from giantbank.com, Ft. Lauderdale, FL. ($2,500 minimum);
• one-year CD - 2.25 percent from Intervest National Bank, New York ($2,500 minimum);
• two-year CD - 2.75 percent from Intervest;
• and five-year CD - 4.31 percent from Capital One, McLean, VA. ($10,000 minimum).

       Before you start out, know the difference between "stated rate" and "annual effective yield" (APY). The rate is a flat, no-frills percentage figure with no interest added on. The APY, on the other hand, is what you earn after the interest is added to the account. The more frequent the compounding, such as daily instead of annual, the better.
       The No. 1 critical issue with CDs is for how long you want to invest. Since you don't know when, or by how much, CD rates may rise or fall, the best strategy is "laddering." Don't dump all your cash into only one maturity, such as a one-year or five-year account. Instead, for example, if you've got $10,000, stagger your investment into, say, three or four different maturities like rungs on a ladder. That way, you'll be able to access funds more frequently, and chances are rates may be higher when a short-term CD matures.
       Editor's Note: Robert K. Heady is the founding publisher of Bank Rate Monitor. He invites Bull & Bear reader mail on consumer money problems and solutions but cannot respond personally to all inquiries. Send e-mail to jrnl8888@aol.com, or write to P.O. Box 14875, North Palm Beach, FL 33408.