Think safety, liquidity and yield when you save

Congratulations! American families finally are saving money.

Our savings rate, which was about zero a few years ago, finally has exceeded 6 percent, according to the federal Bureau of Economic Analysis.

But now that we're finally saving more, savings account rates are close to record lows.

Bank savings accounts and money market funds are often yielding below 2 percent. So is a bank CD for one year!

So how can you boost returns?

You need to very carefully weigh three factors: "Safety, liquidity and yield."

Unfortunately, there's a tradeoff for each. For example:

• The lowest-risk and most liquid investments typically have the lowest yields. By settling for a low yield, you likely can get your cash if you need it. In a bank savings account, for example, not only can you get your cash when you want, but your money is federally insured to $250,000 per person. Also low-risk and low-yielding: U.S. Treasury notes and U.S. Treasury money market mutual funds, which invest in very short-term government-backed securities, and may permit check-writing.

• With higher-yielding investments, consider that there's a greater chance you can lose your money. High-yield bond funds, for example, yield more than 7 percent. But they invest in corporations with poor credit ratings. And some analysts believe many may go belly-up this year.

• You typically can boost your yield by investing for a longer term. But expect to be penalized if you withdraw early. In addition, the longer the term of your investment, generally, the greater the risk that its value can drop if you need to sell. If interest rates rise on a CD, for example, you face a penalty for early withdrawal. In addition, bond prices and interest rates move in opposite directions. So if interest rates rise, bond prices fall. If you need to sell a bond or CD through a broker, you could be selling at a loss. The longer the maturity, the greater the decline in value if rates rise. Beware that with bond funds, managers constantly are buying and selling bonds, so the value of a bond fund constantly fluctuates.

• With other types of less liquid investments, you may face restrictions on when you can sell. They also may prove less regulated. Hedge funds and limited partnerships, for example, may promise fat returns. But those returns may or may not materialize. These types of investments not only may cost more, but they also restrict whether or how often you can sell.

Regardless of how low yields are, you still can grow your stash by cutting investment expenses. So if your family decides to buy stocks or individual bonds, for example, why not shop for the cheapest source? Some brokers take more of a cut on the sale of bonds than others. Meanwhile, you can purchase U.S. Treasury bonds direct from the U.S. government for free at www.treasurydirect.gov. On the mutual fund side, shop for no-load mutual funds, which charge no commissions, at www.mfea.com.

Also, boost earnings by cutting taxes on savings and investments. Consider putting income producing investments, like CDs and bonds, in a tax-deferred Individual Retirement Account (IRA) or a tax-free Roth IRA. Once you've invested all you can in tax-advantaged investments, offset any investment gains with investment losses to $3,000 per year on your income taxes. If you have net losses of more than $3,000, you can carry it over to next year. High-tax- bracket investors might very selectively consider AAA-rated tax-free municipal bonds.

Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Quick Steps to Financial Stability" (Que/Penguin). You can contact them at www.moneycouple.com.