How to get a better rate than a money market account.

How to get yield in today’s 0% environment

If you’re looking at your tax statements from your checking, savings, CD’s, or Money market accounts you may be impressed by how little your savings and investments have returned in the last year.

That’s because the federal funds rate – the rate that it costs banks to borrow money – is effectively 0%. Meaning that since banks can pretty much borrow money for free, they’re not going to pay you much more for the privilege.

This leaves savers in a predicament – should I put that money in stocks for a higher yield but more risk? Or should I leave in savings where it won’t grow, but I can’t lose money?

I propose a third solution. The short duration bond fund.

A money market fund is really a bond fund. A typical bond fund invests in bonds that payout for multiple years and as a result of that longer duration; there is a greater risk to the bondholder that the company could go bankrupt. For taking that greater risk you receive a better yield.

A money market fund is a bond fund that invests in bonds that last from 30-90 days. While they are not guaranteed like many people assume, they are usually consistent because it takes longer than 90 days for most companies to go bankrupt. The warning signs of a pending bankruptcy are usually there for years.

Enter the short duration bond fund. Instead of  30-90 day duration, the ST bond fund investments in 90days to 360 days in corporations, and as high as 5 years in US Treasuries. You take on slightly more risk, but typically receive a yield of 3-4% – significantly more than the 1% or less found in most money market funds.

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