Besides a savings account, where is the safest place to keep my money?
Savings accounts are safe because investors' deposits 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, per account ownership category, so most people don't have to worry about losing their deposits if their bank or credit union becomes insolvent.
Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance. CDs require you to lock up your investment for several months to several years. CDs pay a slightly higher interest rate than savings accounts and, 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 is typically several months' worth of interest.
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. If you think the government will continue to make good on its debts, Treasury securities are similar to CDs in that they typically pay interest at higher rates than savings accounts do, depending on the security's duration. If you sell a security before it matures, you'll lose money, so consider your investing timeline carefully before you buy.
"Safe" is often a misused term. Most consider US Government Treasuries "safe”, because if held to maturity, they have a 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-ended bond mutual funds, you can't 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. And their values/payments are adjusted for inflation.
Both can be purchased very cheaply at: https://www.treasurydirect.gov
I hope this gives you a place to start. Here are some bullet points to keep in mind:
- Who is backing your funds?
- Is inflation a concern?
- What are the fees?
- Do you understand the product?
- How liquid is the asset? (Can you sell easily, without fee or surrender charge)
Mark Struthers CFA, CFP®
Various types of US bonds are generally deemed the "safest" type of investment that one could buy. You can learn more and buy them directly by visiting http://www.treasurydirect.gov/indiv/products/products.htm.
As long as your financial institution is insured by the FDIC, which insures bank accounts, or NCUA, which insures credit union accounts, the coverage limits available from either federal agency will be the same, which is currently $250,000 per depositor. Banks and credit unions will generally offer savings accounts, money market accounts and CD's (certificates of deposit).
Your next option would be to explore short-term government bond ETFs (Exchange Traded Funds) that you can trade daily, if necessary, and buy at any major discount brokerage firm. Here is a helpful list of ETF's that trade for free from Charles Schwab & Co. https://content.schwab.com/web/retail/public/m/Quarterly_ETF_Select_List.pdf
In the current environment, safe = a near zero rate of return so consider your risk tolerance, liquidity needs and investment timeframe carefully.
Best of Luck!
Good question! You have identified savings accounts as a safe place. Make sure you are using a federally insured institution to obtain the safest status (Think FDIC!). Also, as a reminder, do not exceed the FDIC amount in any one account to be on the safe side. You will also want to look at savings bonds and US Treasury instruments such as notes and bonds. As an alternative, you may wish to consider annuity strategies with a highly rated insurance company. Bear in mind that the financial stability of the insurer is your guarantee--research carefully and get all the facts. Best of luck!
The two answers that have already been given are excellent when thinking about the question purely in terms of investment risk. Two of the lowest risk options are definitely CD's and short term US treasuries for all of the reasons cited in those answers.
However, if you start thinking about safety in terms of earning a decent return that will enable you to achieve your long-term retirement and financial goals, these options become a lot less safe given that they are currently each yielding less than 1% annually which isn't even keeping up with inflation at this point.
If this money is needed within the next 1-3 years, then unfortunately you probably should stick with these low risk options and accept the fact that you won't be making much money.
If you're willing to take a little more risk, you could consider corporate bonds. High quality corporate bonds are yielding 3+% in many cases, although you do have more exposure to interest rate risk. (Translation - if interest rates rise quickly, you'll probably lose money.)
Finally, if this is money that you will not need for 7 or more years, I typically recommend that it be invested in a well-diversified portfolio of stocks, bonds and hard assets such as real estate and commodities. We do know that in the short-term, markets can and do decline by 10%, 20% or even 40% in rare cases. But we also know that markets have also historically always recovered and are in effect "safe" if you have the time to ride out the declines.
Check out the following link for a perspective on lengthening your time horizon to "guarantee" investment returns, at least in historical terms:
Hope you've found all of these answers helpful while making your decision!
With Kind Regards,