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We’re all looking for ways to maximize our money by earning a little interest. However, when we invest, we take on a certain amount of risk. The more risk we take on, the higher the potential return.
If you want some returns, but aren’t interested in taking on a great deal of risk, there are some investments that are considered a little safer than others. Investing in these products can provide you with a return, but it won’t likely be a huge return. (See also: Investments WorthMaking With $50 or Less)
What Makes Investments “Safe”?
While there is no way to completely avoid risk, there are some investments that are considered “safer” than others. These investments are considered safe because they might be guaranteed by insurance or provide you with a constant rate of return. Others are considered safe because of who backs them.
Realize that there is always a trade-off for this safety. In return for lower risk, you have to accept that you won’t see as large a return. Indeed, in return for keeping your principal safe, you might actually end up returns so low that your biggest risk is inflation.
Here are five investments that are generally considered “safe."
1. Savings Account
Looking for a high-yield savings account these days seems like a fruitless endeavor. You are lucky to earn a 1% APY. However, these are often considered among the safest places to park your cash. Your principal is protected, up to $250,000 per bank, by FDIC insurance. This means that if the bank fails, you will get your money back.
Many banks also carry other types of insurance that can protect your principal in the event of theft or other problems. Make sure you understand what’s covered, since there are some circ*mstances in which you might not get your principal back.
It’s fairly easy to open a savings account. There are several online savings accounts that offer competitive yields (for the current environment). All you need is basic personal information and an initial deposit, and you can keep your money in a highly liquid account that earns a little something more than your piggy bank.
2. Certificate of Deposit
In most cases, you can find better yields if you decide to go with a CD rather than a savings account. A CD requires that you commit to keeping your money in the account for a specific time period, often ranging from three months to five years (although there are CDs with shorter and longer terms).
In exchange for your willingness to lock up your money for a specific period of time, you receive a higher yield. Invest in a CD at a financial institution that is properly insured. That means a bank with FDIC insurance or a credit union with NCUA insurance. Your principal will be protected from bank failure.
As with the savings account, your main risk with a CD comes from inflation. Even though you can get a higher rate by investing a larger sum of money for a longer period of time, you might still not be able to beat inflation with your return.
You can open a CD fairly easily with your personal information. There are numerous online financial institutions that offer CDs. You might be required to have a minimum deposit for some CDs, especially if you want a better yield.
3. Money Market
Money market accounts are special checking or savings accounts that earn a yield related to the current rates offered in the “money markets,” where short term CDs, Treasuries, bonds, and other very safe investments are traded. If you invest in a money market checking or savings account, your principal is usually protected if you go through a properly insured financial institution. As with checking accounts and CDs, your primary risk will be inflation, which can erode the “real” value of your principal over time.
Opening one of these accounts is fairly straightforward. You will probably (but not always) need a minimum deposit, and be required to maintain a minimum balance, in order to receive the best yield on your money.
Understand that a money market bank account is different from a money market mutual fund. A money market mutual fund is generally considered low-risk, since it invests in cash and “cash-like” products. However, a money market mutual fund isn’t FDIC or NCUA insured, so you can lose your principal. It hasn’t happened often, but there have been instances of money market funds reporting losses. You can find money market mutual funds through most brokers.
4. Treasury Securities
Treasuries are considered among the safest investments in the world because they are backed by the U.S. government — which is in turn supported by what many consider the most stable taxpayer base in the world.
Treasuries are bonds and are used to fund government operations. You can choose from a number of dollar amounts and maturities. The government uses the money and pays you interest. After the maturity period passes, you receive your principal back; you should receive interest payments during the entire period.
It’s important to note that, even though many consider Treasuries a “sure thing,” there is still the possibility of a default. You could, in theory, lose your principal. Also, because rates are low right now, you could face inflation risk on some Treasury products. If you want to reduce your exposure to inflation and protect your principal, you can invest in TIPS or I-bonds, which adjust for inflation.
The best way to invest in Treasury securities is by setting up an account through Treasury Direct. It’s fairly easy to open an account with your personal information, and then begin investing in the securities of your choice. Note that Treasury Direct handles all transactions electronically now; you won’t be issued paper savings bonds.
5. Annuities
Annuities are a bit tricky. They are considered safe because your principal is largely protected (depending on the type of annuity you choose). Annuities are also considered attractive because they offer guaranteed returns. However, annuities can also be complex and riddled with high fees.
The theory behind an annuity is fairly straightforward. You pay large sum of money, and the insurance company guarantees that you will receive a regular income. The income you receive depends on how much money you use to purchase the annuity, and how long you expect to receive payouts.
There are many annuity products. Some of them guarantee your principal, while others can actually result in a loss of principal if something goes wrong. You have to be careful of beneficiary rules, as well as high fees. Do not invest in an annuity until you have had a trusted financial professional, who has no interest benefit from selling you the annuity, review the terms.
Most insurance companies offer annuities. Research the rating of the insurance company, though, since you risk losing your principal if the company fails and isn’t backed up by some sort of guaranty fund.
Bottom Line
There are a number of investing options that can provide you with relatively safe returns. However, you still face risks, and it’s important to understand those before you proceed.
