by Dana George | Updated July 17, 2021 - First published on Oct. 15, 2019
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There's no such thing as a risk-free life, but there are safe places to park your money while you figure out your next step.
The world is a scary place. We're surrounded by a 24-hour news cycle that shares every catastrophic possibility with us. Might a super storm will shut down businesses in our area for a few days? Sure. Are we going to see another recession like the one that nearly drowned us in 2007? Maybe.
Unless a savings instrument is insured, there's still a risk we might lose part -- or all -- of our money. However, there are insured accounts available. For checking, savings and money market accounts, make sure you stash your funds in an account that is covered by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance covers each depositor up to $250,000 per FDIC-insured institution, per ownership category.
Insurance is just one of the things you need to consider. You also need to think about how long term the investment is and how regularly you need to access your money. We've come up with eight low-risk options to suit every situation.
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The interest rates offered on savings accounts can vary wildly between banks. But if you shop around, you can find savings accounts that pay between 1.90%–2.20% on your deposits.
There are also high interest checking accounts out there. Back in 1979, 86% of all payments in the U.S. were made by check. In exchange for that convenience, banks paid very low interest rates. Today, a high-yield checking account allows you to earn from 0.60% to as high as 2.02% APR while enjoying the convenience of a debit card.
Neither of them make you rich, but they do come with FDIC protection, and earning some interest is better than none.
If you're looking for a hybrid between a savings and checking account, a money market account (MMA) may be the closest thing out there. MMAs often offer a better interest rate than savings or checking accounts (currently between 2.00%–2.35%), usually come with check-writing privileges, and can also be FDIC-insured. The downside is that you are restricted to six "convenient" transactions a month.
If you're feeling bolder, look at money market funds -- not to be confused with MMAs. Money market funds are mutual fund investments rather than interest-earning bank accounts and usually offer higher returns. They are a type of mutual fund developed in the 1970s to allow investors to buy into a variety of securities and invest in secure vehicles like government securities and tax-exempt municipal securities. As such, although they are not FDIC-insured, they are still considered less risky than many stocks and bonds.
A certificate of deposit (CD) is a savings account that holds money for a set period. In exchange, the financial institution that holds the deposit pays interest. In September 2019, the best CD rates ranged from 2.45%–3.10%. Generally, terms run in six-month increments, up to five years. The longer the term, the higher the interest rates. When you redeem your CD, you receive the money invested, plus any interest. There are three things you should check: Find out if the interest rate they are paying is fixed or variable; whether the interest is paid monthly, semi-annually, or annually; and whether there are any penalties for early withdrawal.
Municipal bonds (also called munis) work like this: A state, city, county, or other government entity needs to fund its day-to-day obligations or finance a project. To do so, they offer municipal bonds. If you invest, you are lending money to the issuer in return for interest payments (often paid semi-annually), and the return of your principal when the bond matures. A bond that matures in one to three years is considered short-term. A long-term bond may not mature for over 10 years. The interest earned on munis is often exempt from certain taxes and the average real return after taxes and inflation between 1989 and 2018 was 3.18%.
The first U.S. savings bond was sold in 1935 when President Franklin D. Roosevelt signed legislation creating the "baby bond." These savings bonds have gone through different iterations through the years. Now you can buy up to $10,000 of Series EE bonds each year for as little as $25 each. The big draw is that the government promises that these will double in face value in 20 years. In addition, the income from the bonds is not taxed by state or local government and may not be taxed by the federal government if gains are used to pay for higher education. There are also Series 1 savings bonds, which are issued for a period of 30 years, but with no guarantee that they will double in value. The rate of return is fixed for the life of the bond, but sweetened by an interest rate that is adjusted for inflation semi-annually.
While it beats hiding money under your mattress, treasury bills (also called T-bills) will never make you wealthy. They are, however, one of the safest investments available. T-bills are promissory notes issued by the federal government to raise money and regulate the money supply. These notes are normally short term and mature in as little as three months. They commonly pay no interest but are sold at a discount. The money made by the investor is the difference between the purchase price and the redemption value.
A dividend-paying stock is a stock that makes regular payments to shareholders. Most are paid in cash, and most are paid quarterly. Because so many dividend-paying stocks are offered by top-value companies, they are seen as safe, reliable investments.
Preferred stocks are another way to dip your toe into the investment waters. They are safer than other stocks and feel more like bonds. Like bonds, preferred stocks make regular cash payouts, and better yet, preferred stockholders receive their dividends before common stockholders are paid.
Yes, there is still risk involved, as like any investment, the stock market can be volatile. But with a little research you may find that you're ready for it.
There's nothing wrong with being nervous in these uncertain times. And there's nothing wrong with looking for a safe haven while you decide what to do with your money. At some point though, you will want to look at becoming more aggressive. To quote the writer and businessman Robert G. Allen, "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. The Ascent's picks of the best online savings accounts can earn you more than 8x the national average savings account rate.
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