savings

So you’ve got some cash on hand that you’re not going to spend right away. It’s a nice feeling, isn’t it? Maybe you’re saving up to pay your property taxes at the end of the year. Maybe you’re looking forward to a cruise next summer. Maybe you’re about to get married. Whatever the case, you’re looking for someplace to stash this cash — someplace not in your checking account, nor under your mattress. With so many options — CD’s, savings accounts, bond funds, money markets — what do you do?

My short answer? Put the money in a savings account. Make sure it’s FDIC or NCUA-insured, though most of them are. Which one? Simple: whatever’s most convenient for you. I’m partial to ING Direct, because they have no fees, a competitive interest rate, and great customer service (in my experience), and they make it ridiculously easy to open targeted sub-accounts for each of your savings goals. But really, whatever’s most convenient for you.

For the long answer, let’s start by assuming that your baseline is an ING account. No fees, as I mentioned, and currently earning 1% interest. What else could you do?

Well, you could put the money into short-term bond funds, but that’s more risk than it’s worth. As of this writing, Vanguard’s Short-Term Investment-Grade Bond Index is yielding 1.68%. So let’s say you had a whopping $10,000 to sock away. That would get you an extra $68 per year over the ING account — less than $6 per month. And remember, bonds are not FDIC-insured, and hence carry risk. How much risk? Well, think on this — when interest rates go up, bond values go down, and interest rates currently have nowhere to go but up. I’m not saying you shouldn’t own any bond funds right now — quite the contrary — but I definitely wouldn’t look to them for short-term saving.

What about a money market mutual fund? No way. Their interest rates are awful. Vanguard’s Prime Money Market is yielding 0.06%. That’s right — less than one-tenth of one percent. That $10,000 would earn you a grand total of $6 for the year. Again, they have their place, but not in your short-term savings.

If you don’t need access, you could put the money in CD’s. I wouldn’t bother, though. A one-year CD might get you 1.3% or so. Is 0.3% (in the above case, $30 per year!) worth the lack of flexibility? As for CD’s with maturities further out than one year, I wouldn’t recommend it, for the same reason you don’t want to put your savings into bond funds — you don’t want your money stuck in CD’s when interest rates go back up!

I’m sure you’re noticing the theme. The interest rates for just about any safe product are close to 1%, and you have to take pretty hefty risks to get anything above that. So take advantage of the lack of interest rate differentiation to look at other factors: convenience, customer service, ease of use, no fees. You’ve got better things to do with your time than to go chasing rates.

the other edge of credit cards

Hey, I’ve got a secret to share. It’s just between you, me, and the Internet. You ready?

I use credit cards.

I know, right? What about Dave Ramsey’s vaunted “plastic surgery”? Aren’t personal finance geeks supposed to be all about cutting up the CC’s and living off of cash? And aren’t I using the Envelope Method, myself?

Yes, I am, and cash is great — there’s nothing quite like it for knowing exactly how much you have left to spend in your budget. But the fact is, not using the credit cards at all would be leaving cash on the table — to the tune of hundreds of dollars a year.

So here we have the other edge of the double-edged credit card sword (now there’s an image for you). On the one hand, when used the wrong way, credit cards can cost you thousands of dollars in interest. On the other, when “rewards” credit cards are used the right way, you can get hundreds of dollars in cash back. And that’s not to mention other added perks. My favorite is the automatic extended warranty — when I use my card to make a purchase, the duration of the warranty on the item is automatically doubled, up to a full year.

Right now, if you like cold, hard cash-back rewards, two of the best cards out there are American Express Blue Cash and Chase’s Amazon.com Rewards Visa.

I highly recommend Blue Cash. It has all the perks of a normal American Express, including the aforementioned extended warranty, and also pays 3% or 6% back at grocery stores, 2% or 3% at gas stations and department stores, and 1% on everything else. This is new as of April 2011. It used to be that Blue Cash had this tiered system where you got 1% or 0.5% until you spent some thousands of dollars over the course of the year, but that has recently changed; now that the tiers are removed, it makes sense for even more households. And of course there’s no annual fee — for the 3%/2%/1% version, anyway; for 6%/3%/1%, you pay $75 a year. Whether it’s worth it is a simple calculation, if you track your expenses.

(You do track your expenses, right?)

But back to the cards: the Amazon.com Visa is good, as well. You get 3% back on Amazon.com purchases, 2% at gas stations, restaurants, and drugstores, and 1% on everything else. You can buy nearly anything on Amazon.com (deodorant! video games! phone chargers!) — and since you’re not charged sales tax (edit: in some states; here in Texas, that’s going to change as of July 1, 2012) or shipping (if you choose Super Saver), you’ll almost always get a good deal, even without the normal discount that is applied to most Amazon.com items. So 3% on top of that? Sounds good.

The big difference between these cards and others like Discover is that there is no limit to the rewards you can get. Discover was a pretty good card when it came out; you get up to 1% back on purchases, and somewhat recently they added 5% back on certain categories for certain limited times. But as I pointed out last year, you only get the extra 5% bonus up to a certain paltry amount of your purchases, say $300. Generally, it’ll net you less than $5 a month above and beyond the 1% (or less) you normally get.

A final word: all this talk of rewards may sound exciting, but caveat emptor. A friend of mine got really excited when the Amazon.com card came out, as they did a bunch of shopping there; however, a few months later they were several thousand dollars in debt, and the interest rate on the card was nasty, to the tune of almost 19%. That’ll null out your 3% bonus real quick.

(Oh, and if you’re hunting for a new credit card for whatever reason, I recommend NerdWallet.)