Are you missing out on free money?

Consumer Federation of America

You might be missing out on some free money. In essence, that's what the Consumer Federation of America says in a study released in late 2000.

The study found that Americans could be earning a lot more in interest on their cash without taking any, or little, additional risk.

The CFA's study, based on Federal Reserve data, claims that Americans hold more than $1 trillion in low-yielding savings accounts and could collectively earn another $30 billion to $50 billion in interest by shifting that cash into higher-earning alternatives such as money market accounts and certificates of deposit.

What the report found especially surprising was that 70 percent of that $1 trillion was held by just 7 percent of the households, with each of those households stashing at least $25,000 or more in savings accounts.

Of course, most families should have some cash in a savings account that they can access easily. It's good for small emergencies or temporary holding of funds.

But, according to Dennis Filangeri, a certified financial planner based in San Diego, it is not so good for holding large amounts of cash for longer periods — not when you can find safe alternatives that pay interest rates two to three times higher. Even retirees who want to hold cash to help pay for expenses may want to consider these alternatives.

The CFA study pointed out that 57 percent of those with savings accounts don't know the interest rate on the account. According to recent figures from Bank Rate Monitor, the passbook savings account rate in the largest cities in the United States averaged a meager 1.42 percent, with some major banks paying less than 1 percent. Thrift passbooks in these cities averaged 1.84 percent. One can find passbook accounts around the country running closer to 3 percent, but even this rate remains below cash-equivalent alternatives.

Here are some alternatives suggested by Filangeri, what they pay, and why they may be a better choice for you.

Certificates of deposit

The CFA study found that one-third of savings account holders think there is little difference between CD interest rates and passbook rates. But according to Bank Rate Monitor, three-month CDs are earning about 5.5 percent on an annual basis, six-month CDs return about 6.2 percent, and one-year CDs earn roughly 6.4 percent annually. With some shopping, you probably can find even higher rates.

The federal government insures most CDs as they do bank savings accounts, but some consumers don't want to tie up their money and prefer the accessibility of a passbook account. This may make sense for small amounts of money or money you know you'll need in a short time, but it generally doesn't make sense to let large amounts of cash sit in a savings account if you don't need it soon.

If you are concerned about access to the money, stick with shorter-term CDs with staggered maturities. Furthermore, you can cash in a CD at any time without losing your principal deposit. At most, you'll lose a few months' interest if you cash it in early.

Money market accounts and funds

The advantage of money markets is that you can get into them easily with no loss of interest, often by simply writing a check. Taxable mutual fund money market accounts are averaging about 4.5 percent interest, according to Bank Rate Monitor, while bank money market accounts average about half of that.

You can find higher rates, particularly among Internet banks, but just be sure they are federally insured. Unlike bank money markets, money market mutual funds are not federally insured. However, these funds generally invest in high-quality short-term corporate or government bond issues and have an excellent safety record.

Treasury bills

Like CDs, U.S. Treasury securities tie up your money for a set time. Treasuries are safe as long as you hold the securities to maturity, but unlike a CD, you can lose principal if you have to cash in the security early and interest rates have risen since you bought the security.

Generally, you'd want to buy only short-term Treasury bills, which run in maturities of three months, six months or one year. Three-month bills, for example, were returning about 5.8 percent at the end of 2000. Another advantage is that the interest is exempt from state income tax.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at miltzall@starpower.net.