Five things to know about cash

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(Money Magazine) -- Suddenly, cash is king again. With more and more Americans worried about their job security, the personal savings rate has climbed to 3.6%, up from next to nothing two years ago. Investors, meanwhile, have parked billions of dollars on the sidelines while they wait for better days. But with interest rates on savings near record lows, it pays to be savvy about where you stockpile your rainy-day funds. Here's what you should keep in mind.

1. Don't keep all your cash in the same place. There are four ways to use cash, and an ideal account for each. Grocery money goes in checking. Your emergency fund - cash you'll need if you lose a job - must be in a bank account that's 100% safe but needn't be so convenient; if you get a good yield, don't worry if it takes a day or two to transfer the money. Money for a specific purpose, like a wedding, can get a higher yield if locked in a certificate of deposit set to mature when you need it. Your investment portfolio's cash might belong in a money-market fund, but not always (see No. 3).

2. It's safe to shop around. Uncle Sam has your back. For your emergency and special-purpose money, there's no need to settle for low rates at your local bank. You can trust your money to any account insured by the Federal Deposit Insurance Corp., which guarantees up to $250,000 in deposits per depositor per bank (individual, joint, IRA, and trust accounts are insured separately). You can go to Bankrate.com to check the financial health of any bank. Plenty of top-rated online banks now offer 2% yields.

3. Money-market mutual funds aren't a no-brainer anymore. These funds are not FDIC-insured. (Banks' money-market deposit accounts typically are - just be sure the bank says so.) Money-market funds almost never lose a penny, but the crisis has changed the rules: After one fund lost principal last fall, the feds had to step in with a temporary rescue plan. Meanwhile, yields on many funds are now under 2%. If you'll keep part of your portfolio in cash for a while, an insured bank account may be the better deal. But money funds can still be useful. They may be the safest option in a 401(k) plan, and can be convenient when linked to a brokerage account. (Some brokers now offer FDIC-insured accounts too.) Just stick with the big, solid firms. And if a fund promises an unusually high yield, it's probably courting too much risk to be considered cash, says Peter Crane of Crane Data, which tracks the industry.

4. A 2% yield is better than it looks. Low interest rates are bad news if you live off your investment income. But if you are just worried about your savings keeping ahead of rising prices, a 2% yield isn't bad at all with inflation running close to zero, notes Greg McBride of Bankrate.com.

5. You might be better off with "almost cash." There's a whole spectrum of risk between money markets and the typical bond fund. So if the market has you spooked and you want to trim your portfolio's risk, consider some higher-yielding options, advises Evelyn MacIntyre, a Bloomfield Hills, Mich., financial planner. High-quality short-term bond funds may lose money - they fell 4% in 2008 - but they yield over 4%. Stable-value funds also hold bonds but add some insurance on top. They are available only within 401(k) plans and some other tax-advantaged accounts.

Are you a U.S. resident who has lived through a previous financial crisis in another country? If you'd like to share the story of your experience, send an email with your contact information to gmannes@moneymail.com.