When investing your hard-earned money, it's tempting to look for vehicles that speak of "huge returns" in a short time frame. Unfortunately, while you do have the potential to earn a large return on your investment, there's also the chance that you could lose money.
If you're young, you may have decades to make up for risky investment decisions. But as you age or in an uncertain market climate, it may be important to keep your money in moderate investments that aren't as risky. While the stock market has historically provided about 10% annual returns, the market can be volatile and is never guaranteed.
The following investments may not bring the big returns that the stock market could potentially provide. But they can keep your money in a safer place that provides consistent, modest returns for the near future.
- Depending on your age and financial goals, it may be important for you to keep your money in safe investments that aren't as risky as the stock market.
- Some of the safest investments include bank accounts, certificates of deposit, U.S. Treasuries, and money market funds.
- Every investment comes with risk, so it's important to understand your own level of risk tolerance before putting your money in one place.
Bank Savings Accounts
Bank savings accounts tend to pay interest rates that could help you earn money on the cash you stash away there. On average, banks pay about 0.06% interest on deposits under $100,000 in savings accounts.
However, there are savings accounts that pay more, typically with an online bank. These banks offer the same level of protection. They may even offer higher interest rates than a brick-and-mortar bank down the road. High-interest or high-yield savings accounts (HYSA) can help you earn over 1% in interest.
Pros and Cons of Bank Savings Accounts
Easy to open
Insured by the FDIC
Easy access to money with few restrictions
Ideal for emergency savings
Low interest may not keep up with inflation
Rates are not fixed
Taxes due on any interest earned
Pros of Bank Savings Accounts
- Easy to open: You can open a savings account in person, online, or over the phone. The opening minimums are typically low. Some banks may allow you to have multiple accounts, such as one for children, to help you save for short- or intermediate-term financial goals. Some savings accounts offer bonuses for new members.
- Insured by FDIC: The main benefit of a savings account is the safety of your money. All savings accounts are covered by the Federal Deposit Insurance Corporation (FDIC). This means your deposits are insured for up to $250,000 per account. If the bank fails and can't provide you with your money, the FDIC will make arrangements for you to get your money back.
- Easy to access money: These accounts also offer flexibility and easy access to your money. With a savings account, you can generally withdraw money up to six times per month. If you go beyond that limit, your bank may charge fees.
- Ideal for emergency savings: Bank savings accounts are ideal for emergency funds for unexpected life events such as a job loss or prolonged illness.
Cons of Bank Savings Accounts
- Low interest may not keep up with inflation: If you have heard the saying, "No risk, no reward" then you understand that with a savings account comes little risk—and little reward. Some savings accounts may not produce much in interest at all. The rate you can earn on money in a savings account is likely to be lower than inflation rates.
- Rates are not fixed: With high-yield accounts, rates can change, so there's always the chance that the rate on your account will drop over time.
- Taxes are due on interest earned: It's important to know that you may pay taxes on the interest you earn on your money in your savings account, too. However, that's only if you earn $10 or more in interest per year.
Certificates of Deposit (CDs)
Certificates of Deposit (CDs) may be one of the safest investment vehicles out there. If you want to be at the low end of the risk/reward spectrum, CDs might be the right choice. CD investments often require as little as $500 or $1,000 to open. They also pay consistent interest for the length of the term.
Pros and Cons of CDs
Insured up to $250,000 per issuer
Higher interest rates
Variety of terms, including no-penalty CDs
Need to move fast to secure best rates
CDs can be "called in" early
Pros of CDs
- Insured up to $250,000: Like bank savings accounts, the FDIC and the NCUA insure CD accounts up to $250,000 per issuer. That means you can own CDs issued by several different banks and hold them in several different accounts and they'll still be covered.
- Higher interest rates: Compared to bank savings accounts, there's a chance that CDs could pay slightly higher interest rates. CD rates are often between 0.06%-0.56%, on average, according to the FDIC. The higher rates—up to 2.00% APY—are usually the compensation for leaving more of your money in the CD until the maturity date. This could be from three months to 10 years.
- Variety of terms, including no-penalty CDs: When shopping for a CD, look at online banks and credit unions. They often have higher rates for CDs than physical institutions. Consider when you'll need access to that money to choose the right term length. If you think you may need to access cash tied up in a CD, there are ways to avoid paying CD penalties, such as opening a no-penalty CD.
You can also split your money into several CDs with different maturity dates. This technique is called CD laddering and it allows you to stack CDs of different lengths of time so that when one matures, you still have money growing in another CD.
Cons of CDs
- Withdrawal penalties: If you put all of your money into one long-term CD and then need it back at any time, you'll have to pay a penalty. The penalty could be as little as one month of interest or as much as 12 months of interest. It all depends on the CD term.
- Need to move fast to secure best rates: CD interest rates can change fast. If you're thinking about opening a CD today, know that if you wait, that rate may not be the same tomorrow. Look at the best CD rates to ensure you open one with the best rate for that day.
- CDs can be "called in" early: Be sure to notice any special features of the CD before buying. For instance, if a CD is "callable," then a bank could cash out your CD before maturity if they so desire. In most cases, these callable CDs pay a higher interest rate. That's because you are not guaranteed to receive that interest rate until the maturity date. Callable CDs benefit the bank if interest rates go down. You'll get your money back, but now you are holding cash that has to be reinvested at the current lower interest rates.
U.S. Treasury-Issued Securities
The U.S. government has what's called "full faith and credit" for its ability to repay investors of issued securities. It has a strong history of doing so. Investments issued by the U.S. government are very safe. The government can always sell more securities, collect taxes, or print more money. The U.S. economy is large enough that other countries also invest in U.S. securities. That's because they understand the fluctuations of the dollar's value over time.
U.S. Treasury-issued securities include Series EE/E or I Savings Bonds as well as inflation-protected securities, Treasury bonds, notes, and bills.
Pros and Cons of U.S. Treasurys
Invest directly for as little as $25
Wide variety of investments available
Eager marketplace for U.S. Treasurys
No state or local tax on interest earned
Low interest rates
Some maximum limits
Inflation and interest-rate sensitivity
Subject to federal income taxes
Pros of U.S. Treasurys
- Invest directly for as little as $25: You can buy these investments by opening an account directly on the Treasury's website, Treasurydirect.gov, and investing as little as $25 for savings bonds and as little as $100.
- Wide variety of investments: There are a wide variety of investments to choose from, including Treasury bonds, notes, and bills, U.S. savings bonds, and Treasury inflation-protected securities. Some of the investments pay current interest; for others, you buy at a discount and get your return upon maturity. For people who don't need interest payments now, they can purchase zero-coupon bonds. These different securities come with maturity terms that range from a few days to up to 30 years.
- Eager marketplace for U.S. Treasurys: People want to own these types of investments for their high degree of security, so a market always exists to sell your U.S. government investments. If you are not able to hold onto them until the maturity date, you can still get a fair market price when you sell them.
- No state or local tax on interest earned: Interest on Treasury securities is exempt from state and local income taxes.
Cons of U.S. Treasurys
- Low interest rates: With government-issued securities, you'll earn a low return on your investment. Your interest rate will vary depending upon which security you select. Safety comes at a price.
- Some maximum limits: Some securities have maximum limits. For instance, with Series I Savings Bonds—which tend to have higher rates compared to other U.S. Treasury-issued securities—you can only purchase an annual maximum of $10,000 per year.
- Inflation and interest rate sensitivity: Rising inflation and rising interest rates have varying effects on different types of government bonds. Depending on the type of bond you own, if you sell it before maturity, you could get back less than the amount you invested.
- Subject to federal income taxes: Finally, while you won't pay state or local taxes, government-issued securities are subject to federal income taxes. However, some of these taxes can be deferred.
Money Market Mutual Funds
Money market mutual funds are a popular cash management tool; although they are not as safe as bank savings accounts or CDs, they are still a secure place to park your cash.
Pros and Cons of Money Markets
Typically higher returns than savings account
Actively managed by professionals
Your cash is usually available (liquid)
Inability to compete with inflation
Sensitive to low interest rate environment
Not insured like a savings account or CD
Pros of Money Market Funds
- Typically higher returns than savings accounts: With a money market mutual fund, investors purchase a pool of securities that typically provide higher returns than interest-bearing bank accounts. Money markets might have a national rate of around 0.09% vs. a savings account rate of 0.06%.
- Actively managed by professionals: The primary benefit of a money market fund is the active management of very short-term investments. A mutual fund company has professional researchers, analysts, and traders. They manage a large group of investors' money with the goal of doing better than what the Treasury yield will do in the same period. Bear in mind—we are talking about very small increments of return.
- Your cash is usually available (liquid): Because of the short-term nature of the fund objective, investors generally have the ability to put money in or take money out at any time.
Some money market funds have higher minimums or limited liquidity. This allows the fund a more consistent use of investor money; thus funds with higher minimums or limited liquidity often pay a slightly higher yield.
Cons of Money Market Funds
- Inability to compete with inflation: A common theme with safe investments is the inability to compete with long-term inflation rates. Although money market funds aim to keep a stable value of $1 per share, it is not guaranteed.
- Sensitive to low interest rates: When interest rates are low, money market funds have a harder time producing better income yield for investors. This is due to the costs of operating the fund. There is a chance that the yields could be as low as .01%. In the past, some funds have even "broken the buck," meaning the share price went below $1. These losses were passed along to investors.
- Not insured like a savings account or CD: In terms of safety, the main drawback is no guarantee by the "full faith and credit" of the U.S. government or the FDIC. Instead, the account will have coverage by the Securities Investor Corporation (SIPC). This coverage is different from FDIC; it may help you recover some investments if the brokerage firm goes out of business, but it does not insure the value of your investment against market losses.
The Bottom Line
Before investing any money, do your research on the various options available to you. Every investment comes with risk, so it's important to understand your own level of risk tolerance before putting your money in one place.
It may be smart to work with a financial advisor to ensure you're practicing smart investment strategies that will help you optimize your chances of earning money on your investments in the future.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.