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Best places to park your cash
No offense to piggy banks and mattresses, now there are a few better places to store your cash.
September 20, 2005: 4:07 PM EDT
By Jessica Seid, CNN/Money staff writer
CDs & Money Market
MMA 0.69%
$10K MMA 0.42%
6 month CD 0.94%
1 yr CD 1.49%
5 yr CD 1.93%

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NEW YORK (CNN/Money) - Now that interest rates are finally above water, this is a golden opportunity to make some dough on your dollars.

The Federal Reserve has boosted interest rates 11 times since June 2004, most recently on Tuesday, lifting the benchmark short-term rate from a historical low of 1 percent to 3.75 percent, the highest level in four years.

Which means, there is no better time to sock away some cash in an interest-bearing account.

Frank Trotter, president of EverBank Direct, advises consumers to stow their cash in short-term accounts to avoid getting locked in if the Fed pursues its current path of rate hikes.

"Stay short, take the higher rate and do a little bit of homework," Trotter said. "It's worth something now."

To that end, here are some options to consider:

Savings accounts - Savings accounts let you keep your money in a safe place while it earns a small amount of interest each month. There is usually either no minimum balance or a low minimum balance requirement, and there are no restrictions on how many checks your can write or when you can withdraw your money.

Pro: The bank is one of the safest places to stash your cash since your account is insured against loss by the federal government for up to $100,000 per depositor.

Con: Even at a low rate of inflation, the annual increase in prices usually outpaces what banks pay in interest-bearing accounts. In other words, the interest rates you earn on a checking or savings account often doesn't exceed the average annual inflation rate, which has generally hovered just over 3 percent from 1926 to 2005.

Money market accounts - A money market account is an interest-earning savings account offered by a FDIC-insured financial institution with limited transaction privileges. Many money market accounts place restrictions on the amount of transactions you can make in a month and you usually have to maintain a certain balance to receive the higher rate of interest. Some banks require at least $500, others require a much higher balance.

Pro: The interest rate paid by a financial institution on a money market account is usually higher than that of a regular savings rate.

Con: You are usually limited to six transfers or withdrawals per month, with no more than three transactions as checks written against the account.

Certificates of deposit - When you purchase a certificate of deposit (CD), you invest a fixed sum of money for a fixed period of time -- six months, one year, five years, or longer -- and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest.

The interest rate changes based on the length of time you leave the money in the account. The shorter the term of the CD, the lower the rate you'll get.

Pro: CDs offer some of the best guaranteed rates on your money and are insured up to $100,000 each.

Con: In exchange for a higher interest rate, you can't write checks or withdraw the money for the term of the CD. If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate. You can get money out of a CD prematurely, but you'll pay a penalty -- typically three months' interest.

Once you've determined which banking service is best for you, find the highest rate and watch the savings accumulate.

You can use the Internet to compare fees, yields and minimum deposit requirements nationwide. Keep in mind, rates at Internet banks often beat those at a traditional bank, and account fees tend to be somewhat lower.

Switching $10,000 from a savings account that pays 2 percent interest to one that pays 3 percent will yield an additional $100 a year.

That's something your piggy bank could never do.


Click here to search for rates on CDs, money markets and interest checking accountants.

To find out how fast your savings will grow depending on an interest rate, initial deposit, and additional payments, use our savings calculator.  Top of page

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