Making Money Grow

Where to Store Your Cash
In an Era of Skimpy Interest Rates

By Karen Blumenthal
Staff Reporter of The Wall Street Journal

You've heard the advice a jillion times: Save! Save! Save!

No doubt, you have gotten the message: You need some savings for emergencies and unexpected expenses, like a flat tire. And without putting away some money regularly, it's very hard to come up with a down payment for a car or house, pay college expenses or to ever retire comfortably.

Setting aside a little money every month or regularly putting holiday or birthday checks into savings is tough enough. But savers have faced an even greater challenge in recent years: How to make that hard-earned money grow.

Ideally, savings accounts earn interest or investments grow in value over time, adding handsomely to your nest egg. But interest rates today are painfully low and many typical investments have been disappointing for the last couple of years.

Still, knowing your options can help you find the best spot for your money. Here are some of the choices:

Savings accounts. Bank and credit-union savings accounts are often the first place savers turn. They are the most convenient accounts, since you can easily add to or withdraw from them at ATMs and transfer money between accounts online. Some banks and credit unions will open a student account with as little as $5 to $25.

These accounts are also the safest of investments, since the federal government insures them up to $100,000.

At the same time, interest rates on savings accounts are downright miserly these days. While interest rates on car loans and personal loans have been rising, rates on savings accounts have hardly budged, and average about 0.4% nationwide, according to Bankrate.com, which tracks rates on all kinds of bank interest rates. That means a $100 savings account will earn just 40 cents a year in interest-not even enough to buy a candy bar.

What's more, once you turn 18 or 19 years old, many banks start assessing a $3 monthly fee for balances of less than $300-although some banks may waive that fee if you stay in school or if you or your parents have other accounts with the bank.

One alternative is to consider an account with an online bank, which typically pays higher rates than a brick-and-mortar bank. The Orange savings account from ING Direct has no minimum balance requirement and doesn't charge monthly fees. As of late last year, it was paying an annual interest rate of 2.25%. That won't make you rich, but at least your interest is enough to buy a latte.

Certificates of Deposit. CDs offer a higher interest rate than a savings account, but with a tradeoff. CDs require you to keep your money in one place for a fixed length of time in exchange for a fixed interest rate.

As of late last year, the average one-year CD paid about 1.83% in annual interest. If you agree to lock up your money for two years, the annual interest rate would climb toward 3%. Those rates may pay off if you won't need your money for that period of time.

While CDs sold by banks are insured, they still carry some risk. If interest rates climb after you buy the CD, your rate won't go up. You can withdraw your money early if you need it, but you will lose some of your interest as a penalty. Also, banks and brokerage firms usually require a minimum investment of $1,000 to buy a CD.

Money-market accounts and funds. These are another option if you have a fair bit of savings, but want your investment to be "liquid," or available to you at all times. Money-market accounts, which are offered by banks, and money-market funds, which are offered by brokerage firms and investment companies, are like super savings accounts. Both pay higher interest rates than savings accounts, but less than CDs. Both are considered safe investments. But they also may require hefty minimum investments of $1,000 or more.

Stocks and mutual funds. Stocks and mutual funds offer the greatest chance for gains-and the greatest risks for losses. This is the place for money that you won't need for at least a few years-and then, only if you can stand to watch the value go up and down.

Stocks represent a small bit of ownership in a company. Mutual funds are baskets of stocks managed by an investment company. Some funds aim to mimic the investment mix and performance of big stock indexes, like Standard & Poor's 500-stock index of 500 major companies. Others buy stocks with the potential for fast growth or the stocks of well-established companies.

Over time, investments in stocks have produced the greatest returns for investors. But there's no guarantee that they will produce a profit for you this year, or ever.

If you have long-term savings and want to try the stock market, your best bet is to start with a mutual fund. You'll want to look for "no load" funds, which simply means funds that don't charge you a fee when your buy or sell your investment. Morningstar and Lipper, two companies that provide mutual-fund information, rate and rank funds on the basis of historical performance and costs, and both have Web sites (www.morningstar.com and www.lipperleaders.com) that help you search for good prospects.

Look first for the return the fund has produced for investors. While a fund's history doesn't guarantee its future, it's at least one indicator of how well the fund is doing. You should also look at a fund's expenses, since that money will be deducted from your investment returns.

Many mutual funds require an initial investment of at least $1,000. But some companies, including T. Rowe Price, allow you to start with as little as $50 if you agree to invest $50 each month directly from your checking account.

If the fund you choose doesn't offer that option, Jeff Tjornehoj, research analyst at Morningstar, suggests calling the company to see if it will bend its requirements for a young investor. "Some fund companies are more responsive to that than others," he says, recognizing that you "could be a lifelong client."

Do you have a question about money? Write to consumered@wsj.com.