I highly advocate that investors keep an emergency stash of risk-free assets that can quickly be turned into cash. You never know when illness, unemployment or some other personal catastrophe might strike.

What's more, it's always a good idea to have some cash on hand in case an exceptional investment opportunity should present itself. Generally, investors should maintain a cash hoard equal to at least six months' worth of living expenses. Retirees who depend heavily on stock market gains to pay the bills should hold at least three years' worth of living expenses in the form of cash.

But what kind of cash?

Obviously, not dollar bills. Inflation eats away at the value of a greenback every day.

In some market settings, 13-week or 26-week U.S. Treasury bills can provide a good safe haven for your money. There's no risk of default, and the interest you earn on Treasury paper is exempt from state and local (not federal) income tax.

Right now, though, T-bills aren't such a great deal. Fear has triggered a stampede of investors into T-bills, driving yields to abnormal lows. Lately, for example, the yield on the 13-week bill has fallen to 3.3%. Birdseed, I call it.

Earn a 50% Higher Yield

By shopping carefully, you can pocket much higher yields, with little to no extra risk. Start by opening one or more money market accounts with Internet-based banks. Banks that do business over the Net can dispense with the cost of operating bricks-and-mortar branches. The savings are passed on to you.

A couple of things to beware of, however. To be completely safe, you shouldn't allow your balance to go above the limit for federal deposit insurance (generally $100,000 per depositor, per institution; $200,000 for joint accounts). One large Web-based bank, NetBank, recently went belly-up. Insured depositors had the backing of the U.S. government; folks who overshot the insurance limit will be at the mercy of the bankruptcy court for the excess amount.

Also, bear in mind that Internet banking carries potential customer-service issues (just like buying goods via mail order, to use an old-time analogy). You can't walk into a lobby somewhere and demand satisfaction.

Thus, it's important to deal with providers that strive for a high level of customer service. I've heard complaints about the service at ING Direct, a bank I ceased to recommend several years ago. (Their rates are also inferior.) Stay away.

Check out my December issue to see who I am recommending now.  This New York bank currently pays 4.75% on money market deposits, with no minimum balance required. That's almost 50% higher than a T-bill, and you can access your money anytime via electronic funds transfer between them and your hometown bank.

Lush CD Rates, Too

If you don't think you'll need all your money immediately, consider shifting part of your cash reserve into CDs.  I recommend Discover Bank (800/347-7000 or www.discoverbank.com) for six-month CDs. You'll pull down a yield of 4.75% on deposits of $2,500 or more. GMAC Bank (866/246-2265 or www.gmacbank.com) pays 4.6% on $500 or more.

Tactics for Success

So, for some more specific tactical advice, I turn to my Incredible Dividend Machine, a roster of stocks that will enable you to earn dividend checks every month of the year.

Since June, nearly half the companies (11 out of 23) in the Incredible Dividend Machine raised their dividends—a remarkable vote of confidence for the strategy. After all, the basic idea of the Machine is to beat the rising cost of living by earning a higher and higher income over time. Dividend-rich common stocks can do that for you. A portfolio locked into long-term fixed-rate bonds can't. 

Now, if you're just launching your own Dividend Machine, your first priority is to make selections from each of the three dividend cycles found in Richard's December 2007 issue of Profitable Investing.  That way, you'll be collecting checks every month of the year—a boon to folks who actually plan to live on their dividends.  Once you've filled your cart with the priority buys highlighted, you can spread your wealth to the other names in the table.  Save the highest-yielding stocks for later on, perhaps after the turn of the year, when we'll have a better fix on how the economy is reacting to the Fed's rate cut.

Tap into Richard's entire Profitable Investing model portfolio and his latest Incredible Dividend Machine with their RISK-FREE trial subscription. See which stocks he's blacklisted and which funds he's forgetting about in 2008! Richard Band's recommendations for conservative investors have grown 900% since 1984! Don't miss out!