Question/Comment: As a long time observer of the mortgage market, particularly the subprime segment, I have been anticipating the current economic crunch for some time. Accordingly, I have been keeping a large amount of my savings ($85K) in an FDIC insured money market account that is currently earning 5.25 percent. Now that it appears rates will be dropping, where is the best place to keep the bulk of these funds? (Besides under my mattress, that is.)
Paul Solman: I wouldn’t recommend the mattress. I don’t know about San Diego, but those bedbugs now infesting New York City may eat currency.
“The best place”? If you mean safest, there are US-government I-bonds. You can buy up to $30,000 worth per family member per year, and they guarantee an interest rate of the CPI plus a premium, which is currently 1.3 percent. With a 1.21 percent inflation rate, the yield is only 2.51 percent at the moment. It’s reset every 6 months, and will be again Nov. 1. The real appeal is that if you don’t take the money out for six months, I think it is, your interest accrues tax-free, until you withdraw the money. The government has more information here.
Another similar option is TIPS. Read about, even buy them, here. Basically, they’re a longer-term version of an I-Bond, and as a result, the non-inflation-protected part of interest rate (the “premium”) is generally higher.