Cash is back in vogue. With the stock market struggling (although a rally might be on the way) and the recession causing people jitters, it is little surprise that the savings rate is on the rise and that more people are turning to cash to fulfill their spending and investing needs. Many people have stopped using credit cards, trying to cut down on debt and avoid paying interest.  At the same time, consumers are cutting back their spending overall and putting money away in savings accounts.

Depending on your goals, and what you use your cash for, though, you might consider different types of accounts. If you plan out how to use your cash, you will be more likely to benefit from it — and provide yourself with the maximum returns possible with a low-yielding investment like cash. Here is a basic rundown of four places you might keep your cash:

1. Checking account. This is a cash account that you should use for bills and regular expenses like grocery shopping. A debit card can make these purchases convenient. Make sure you have the money that you need to cover expenses, plus a modest cushion, in your checking account. There are some local banks that have started offering rewards checking. These accounts offer APY of between 1.5% and 6%, depending on the kind of account you get. Make sure you understand account minimums, restrictions and other information before you open an account.
2. Emergency fund. It is a good idea to have an emergency fund. Try to build up to three to six months of expenses (or even eight to twelve months). Even if you can’t put it in all at once, get started. You should put your emergency fund in a high yield savings account that is FDIC insured. Look online for banks that offer reasonably good yields of between 2% and 3.5%. It’s okay if it takes a day or two to transfer; the point of an emergency fund is that it should be liquid, but not too accessible.
3. Savings for a purpose. Saving up for a vacation or for a wedding? Put your cash in a CD or set up a CD ladder that coincides with your needs. Again, make sure it is FDIC insured so that you are properly protected. This requires planning, however, since you will have to figure out when you will need the money.
4. Reducing investment portfolio risk. One way to diversify your investment portfolio’s risk is to invest in money market mutual funds or other cash investments. Be aware, though, that it is possible to lose money in such investments, since they do have risk. Another thing you can do is add “near cash” investments. These are investments like bonds that are almost like cash. They still represent the possibility of loss, but they are considered “safer” than some other investments. The goal of cash and near cash investments is to preserve capital to beat inflation, rather than earn aggressive returns.

Can you think of any other places to put your cash? What do you prefer to do with your cash?

image source: sxc.hu

As much as possible, even when you are already in deficit on your monthly expenses, put away some amount into an emergency fund. With hard times worsening from week to week, you have to prepare for a future when your finances drop to near zero. Or, worse –if you or a member of your family gets sick or meets an accident or some disaster strikes, immediate funds will be required.

Don’t just keep your emergency fund in a piggy bank, in a cookie jar, or under your mattress. Place it in an earning certificate of deposit, a money market account, or a simple savings account. Even if the yield rate on your emergency fund may be lower than the inflation rate, you are at least mitigating the effects of an erosion of the value of your money and what it can buy.

image from Microsoft Clipart