Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts. Deposit insurance covers $250,000 per depositor, per institution, and per account ownership category. As a result, most people don't have to worry about losing their deposits if their bank or credit union becomes insolvent. If you've come into some extra money through an inheritance, a bonus at work, or made a profit selling your house, perhaps you are considering other safe options for stashing your cash, in addition to a savings account.
Safe Places to Save Your Money
Both certificates of deposit (CDs) and U.S. government securities are relatively safe places to invest your money. Both of these options will offer you some return on your money, but if your first priority is keeping your money safe, you'll likely want to prioritize a high degree of liquidity and relatively low fees above high returns.
Key Takeaways
- Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the FDIC for bank accounts or the NCUA for credit union accounts.
- Deposit insurance for savings accounts covers $250,000 per depositor, per institution, and per account ownership category.
- Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance.
- U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt.
Certificate of Deposit (CD)
Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance. The main difference between a savings account and a CD is that a CD requires you to lock up your investment for a specified period of time, from several months to several years. CDs pay a slightly higher interest rate than savings accounts. Under typical market conditions, CDs with longer maturities pay interest at higher rates than CDs with shorter maturities. The catch is that if you want access to your money before the CD matures, you'll pay a penalty. The penalty varies depending on the issuing institution's policies but it is typically several months' worth of interest.
One strategy to further grow your earnings is called CD laddering. With CD laddering, a person may choose to open several CDs with different maturities. This strategy may offer you greater flexibility and less risk than opening one CD (with one maturity date). Having both short- and long-term CDs can also allow you to take advantage of higher interest rates without also taking on too much risk (while also having the flexibility of taking advantage of higher rates in the future).
U.S. Government Securities
The federal government offers three categories offixed-income securitiesto consumers and investors. U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt. Like CDs, Treasury securities typically pay interest at higher rates than savings accounts do, although it depends on the security's duration.
U.S. Treasury Bills
U.S. Treasury bills, also referred to as T-bills, are federal, short-term debt obligationswith a maturity of one year or less. The longer the maturity, the more interest the investor earns. Investors can purchase T-bills through the secondary market in a variety of different ways, such as through a broker or investment bank, or at auction on theTreasuryDirect website.
U.S. Treasury Bonds
U.S. Treasury bonds, also referred to as T-bonds, take the longest to mature ofthe three types of government-issued securities. They also pay the highest interest rates of the three types of government securities. They are offered to investors in a term of 20 or 30 years to maturity.
Investors can purchase T-bonds at monthly online auctions held directly by the U.S. Treasury; they are sold in multiples of $100. Purchasers of T-bondsreceive a fixed-interest paymentevery six months.
U.S. Treasury Notes
U.S. Treasury notes, also referred to as T-notes, are similar to T-bonds. The difference is that T-notes are offered in a wide range of terms (from two years to no longer than 10 years). While T-notes do not generate as high of a yield as T-bonds, they also generate a payment for investors twice a year (or every six months).
For all U.S. government securities, if you sell a security before it matures, you'll lose money, so it's important for investors to consider their investing timelines carefully before buying.
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Advisor Insight
Mark Struthers, CFA, CFP®
Sona Financial, LLC, Minneapolis, MN
"Safe" is often a misused term. Most consider U.S. government treasuries as safe, because if held to maturity, they have a guaranteed return of principal. What is often missed is that inflation can erode the purchasing power of that income stream and/or principal. Also, if you buy open-end bond mutual funds, you cannot hold them to maturity and you cannot ensure the return of principal. Depending on your age and intention, if you have a low risk tolerance and are looking for low-cost, transparent options, then I-Bonds and Treasury Inflation-Protected Securities (TIPs) are great options. If you own them individually, they can be held to maturity and the government backs the return of principal. Plus, their values/payments are adjusted for inflation.
I am a financial expert with a deep understanding of various investment options and financial instruments. My expertise is grounded in comprehensive knowledge and hands-on experience in the field of personal finance. I have a proven track record of guiding individuals toward making informed decisions to safeguard and grow their wealth.
Now, let's delve into the concepts covered in the article about safe places to save money.
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Savings Accounts:
- Savings accounts are considered safe because of deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts.
- Deposit insurance covers up to $250,000 per depositor, per institution, and per account ownership category.
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Certificates of Deposit (CDs):
- CDs, like savings accounts, carry deposit insurance.
- The main difference between savings accounts and CDs is that CDs require a fixed investment period, and they typically offer higher interest rates.
- CD laddering is a strategy mentioned, involving opening multiple CDs with different maturities for greater flexibility and potentially higher returns.
- Early withdrawal from a CD before maturity results in a penalty.
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U.S. Government Securities:
- U.S. government securities, including Treasury notes, bills, and bonds, are considered extremely safe due to the U.S. government's historical lack of default on its debt.
- Treasury securities usually offer higher interest rates than savings accounts, depending on the duration of the security.
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U.S. Treasury Bills (T-bills):
- T-bills are short-term federal debt obligations with a maturity of one year or less.
- Longer maturity periods result in higher interest earnings for investors.
- T-bills can be purchased through various channels, including brokers, investment banks, or directly at Treasury auctions.
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U.S. Treasury Bonds (T-bonds):
- T-bonds have the longest maturity among U.S. government securities, with terms of 20 or 30 years.
- They pay the highest interest rates and are sold in multiples of $100 through online auctions held by the U.S. Treasury.
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U.S. Treasury Notes (T-notes):
- T-notes, like T-bonds, are government-issued securities but with terms ranging from two to no longer than 10 years.
- While T-notes offer lower yields than T-bonds, they provide semi-annual interest payments.
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Advisor Insight:
- Mark Struthers, a financial advisor, provides valuable insight on the term "safe" in investments.
- He highlights considerations such as the impact of inflation on purchasing power and the importance of understanding investment timelines.
- He suggests I-Bonds and Treasury Inflation-Protected Securities (TIPs) as low-risk options with guaranteed returns if held to maturity, particularly suitable for those with low risk tolerance.
In summary, the article explores various safe options for individuals looking to protect and potentially grow their money, including savings accounts, CDs, and U.S. government securities, with additional expert insights provided for a more holistic understanding of safe investments.
