• What they are: Low-risk, short-term obligations that provide returns in the form of interest payments.
  • Pros: Low- to no-risk; easily redeemable; often FDIC insured.
  • Cons: Withdrawal penalties may apply; low return.
  • How to invest: Directly through financial institutions; your broker; your local bank or credit union.
Cash investments are easily redeemable, low-risk places to park your cash. Since the money is easy to get to, you can earn a small return while keeping cash available in case of emergencies. Cash investments include CDs, guaranteed investment contracts (GICs), money market deposit accounts, money market funds and savings accounts. Any earnings on these investments are inherently low due to their no-risk nature.

Certificates of Deposit (CDs)
A CD is a type of savings instrument issued by a bank, credit union or broker. They pay a specified rate of interest over a defined period of time, and repay your principal at maturity. If you cash in or redeem your CD before maturity, you may have to pay an early withdrawal penalty. CDs can be issued in any denomination, and maturities typically range from one month to five years or longer. They are FDIC-insured if they are issued by an FDIC-insured bank. If you buy a CD from your broker, the money should be put in a CD account at an FDIC-insured bank. If not, your CD will not be insured by the FDIC.

Guaranteed Investment Contracts (GICs)
GICs are insurance contracts that guarantee the owner a fixed or floating interest rate for a set period of time, plus the repayment of the principal. GICs essentially work like giant CDs but without FDIC insurance. Typically, GIC contracts run from one to seven years. These contracts are a popular investment options for 401(k) plans.

Money Market Deposit Accounts (MMDAs)
Money market deposit accounts are a type of savings account that offer a more competitive rate of interest in exchange for larger-than-normal deposits. MMDAs typically have restrictions that limit the number of transactions you can make each month and set a minimum balance in order to receive the more favorable interest rate. Funds in MMDAs are FDIC insured.

Money Market Funds
Money market funds are a type of mutual fund that deal in debt obligations. Unlike money market deposit accounts, money market funds are not federally insured. Money market funds may invest in:
  1. U.S. Treasury funds
  2. U.S. Government funds
  3. General purpose corporate funds
  4. Tax-free money market funds that invest in municipal bonds
Savings Accounts
Savings accounts are deposit accounts held at a bank or other financial institution, providing principal security and a modest interest rate. Although savings accounts pay lower interest rates than CDs, they typically offer better rates than checking accounts. There may be restrictions on the number of transactions that can be made each month.

Next: Analyzing The Best Retirement Plans And Investment Options: Direct Reinvestment Plans (DRIPS) »

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