Updated: May 3, 2013 12:14PM
The bank safety scare of the past two weeks has sent depositors scrambling to check the rules for FDIC insurance (see previous columns and the link to the FDIC Web site at www.TerrySavage.com). But even though you can arrange extra coverage at your bank by using a combination of single, joint, and trust accounts, many people are wondering where else they could put their money and sleep well at night.
By definition, this is "chicken money" -- money you can't afford to lose. For many people it's all the money they'll ever have, and at their age or stage in life they can't afford risk of loss. For others, it's a stash of safety that gives them courage to stick with long-term stock market investments, knowing a portion of their nest egg is safe and secure. Others merely need to stash cash, say from the sale of a home, for a short period of time.
You must remember that the top priority for "chicken money" is safety, and a certain degree of liquidity. "Chicken money" doesn't earn a lot of interest, and you can certainly get higher returns elsewhere. The interest you receive will barely keep up with inflation -- or you may actually fall behind after taxes are paid on your earnings.
But the mantra of the "chicken money" investor is: I'm not so concerned about the return ON my money, as I am about the return OF my money!
That understood, here are some alternatives to bank deposits -- and one clever way to increase your deposit coverage.
These are short-term IOUs from the federal government, which borrows billions of dollars each week at regular auctions, to pay off maturing debt -- and to pay the government's bills as it falls farther into debt! So far, the world considers these short-term IOUs from the United States government to be the safest investment of all.
You can buy Treasury bills in $100 minimums online through the Treasury Web site, www.TreasuryDirect.gov. When you get there, click on the section for Individual Investors. You'll immediately see instructions on how to open an account. You'll need your name, address and Social Security number, plus your bank account number and routing address.
Your Treasury purchases are paid for by debiting your bank account. And the interest you earn will be automatically deposited back into that same account. You can purchase as little as $100 of Treasury bills, or millions of dollars, using this service. It's all done electronically.
For liquidity, you'll purchase bills that mature in 4 or 13 or 26 weeks, but you can purchase Treasury securities that mature from 2 year to 20 years.
If you have large sums to invest, you may want to stagger your purchases so they mature on a regular schedule. At maturity the funds can be deposited back into your bank account, or you can give instructions to have your investment "roll-over" at maturity into newly issued Treasury bills. You should plan to hold your investment at least until it matures, as there are costs to getting your cash early.
What's the interest rate? That's set by the large institutions who bid competitively to buy huge amounts of these securities. Individual investors agree to accept the average rate set at the auction. But you can be sure the market has determined the most acceptable rate of interest.
Treasury money market mutual funds
Money market mutual funds are not FDIC-insured, but if you choose a money market fund that purchases only short-term Treasury securities you're at the top level of financial safety. Some money market mutual funds purchase short-term commercial paper or other top-rated short term securities.
Theoretically this is a very fine distinction, since no modern money market mutual fund has ever "broken the buck" or lost money. That is, the value of one share of a money market fund is one dollar -- and in no case in modern history has that been breached.
But Treasury-only money market mutual funds add an extra degree of safety in their internal investments. You can find them at the major mutual fund companies. The one I have personally used for the longest time is Capital Preservation Fund at AmericanCentury.com.
Certificate of Deposit Account Registry Service (CDARS)
Banking experts including the former C Comptroller of the Currency, Eugene Ludwig, as well as Alan Blinder, former Federal Reserve vice chairman, and Mark Jacobsen, former FDIC chief of staff, have devised a system of spreading the risk of bank CDs through electronically distributing your deposits to a large group of participating banks.
If your bank is part of the CDARS network, it will use the network to distribute portions of your cash -- in smaller chunks to stay under the insured limit -- to other bank members of the network. This saves you the time and trouble of running around town to open different accounts at different banks.
But every time your bank buys a CD for you, the other bank in the network simultaneously deposits the same amount back into your bank in separate accounts, where it will fall under the $100,000 insurance limits. So, in effect, the money never really leaves your bank, but now it is all insured.
The receiving bank does not know your name or have any other personal identification. You're still a customer of your own bank. All of the accounts at the other banks are in your account number, and all earn the same rate. You get one 1099 form for the interest you've earned. And it's all completely confidential.
While you can't direct that your money to go to a specific bank, you can veto use of any bank before the money is distributed. And the service checks by using your Social Security number to ensure that they do not distribute your deposit to another bank where you may already have an account.
For more information, and to find a bank that is a participant in this network, go to www.CDARS.com.
One final thought: If you've read this column, it's because you're concerned about the safety of your money. So don't overlook that other insidious thief that already has access to your accounts: Inflation! At the current 5 percent rate, it would cut your spending power in half in 14 years. Now that's something to worry about -- and that's The Savage Truth!
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.