Safe Investments To Keep Your Money Secure

When you decide to invest your hard-earned money, it's tempting to look for investment vehicles that speak of a "huge return" in a short time frame. Unfortunately, while you do have a small probability of making a large return, you have a much larger probability of losing your hard-earned money.

If you're young, you have possibly decades to make up for risky investment decisions, but as you age, it's more important to keep your money safe and grow it at a slower, but more reliable rate. The following ideas may not bring huge returns, but they'll keep your cash liquid while not too easily accessible, and safe while paying you a fairly consistent, modest return.

Bank Savings Accounts

Bank teller and savings account customer
Bank savings accounts are not tied to investment risk. You are able to withdraw your savings as desired. Petrified Collection / Getty Images

A bank savings account holds money that you don't need to access regularly. When contrasted with checking accounts, bank savings accounts tend to pay a slightly higher interest rate.

You can open one in person, online, or over the phone. The opening minimums are normally low, and banks will allow you to have multiple accounts, for example, for minor children, to help you save for short or intermediate term financial goals.

What Are the Benefits?

The main benefit of a savings accounts is the safety of your money. All savings accounts are covered by the Federal Deposit Insurance Corporation (FDIC) which insures your deposits 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.

These accounts also offer flexibility and easy access to your money. You can put in small or large amounts often and take your money back out when you need to. Bank savings accounts are ideal for emergency funds for unexpected life events such as a job loss or prolonged illness.

What Are the Drawbacks?

If you have heard the saying, "No risk, no reward" then you understand that as you have no risk of losing money that means you will also receive minimal reward or interest for your money. The interest rates earned on bank savings are likely to be lower than inflation rates. Although, there are some banks that do offer high-yield savings accounts.

You'll pay taxes on the interest you earn on savings accounts too unless your savings account is an Individual Retirement Account (IRA); in this case, interest accrues and you only pay taxes when you withdraw amounts in retirement.

If you plan to have a savings account, consider an internet bank. Internet banks have the same level of protection and offer much higher interest rates than a bricks and mortar bank down the road.

Certificates of Deposit (CD's)

Stock certificate
Certificates of Deposit have a specific maturity date. At maturity, the face value is returned with any accrued interest owed. CD's have Federal insurance limited by issuer and account. Comstock / Getty Images

Certificates of Deposit (CDs) make 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. The typical minimum CD investment is $1,000 and any amount after that in $1,000 increments. Some banks will start lower and others have $25,000 minimums.

What Are the Benefits?

Like bank savings accounts, the FDIC insures up to $250,000 per issuer per account. You can own CDs issued by several different banks and hold them in several different accounts to get insurance coverage for more than $250,000. 

The biggest differences with CD's compared to bank savings accounts is that CDs pay slightly higher interest rates. The higher rate compensates you for agreeing to leave your money in the CD until the maturity date when the bank returns your money plus interest.

If interest rates have fallen during this holding period, then you are likely getting a better rate of return than you would have gotten in a bank savings account or money market.

CDs are issued from many banks and can be bought or sold directly from a bank or through brokerage companies like Schwab or Vanguard. When you shop for a CD, you can pick ones that mature near a date where you think you will need your funds.

You can also split your money into several CDs with different time horizons, This technique, called CD laddering, allows you to always have some money available in the near future, instead of locking all of it up for one year, for example. 

What Are the Drawbacks?

If you put all of your money into one long-term CD and then need it back at any time, CD's may not be the best for you. If you have to sell a CD before its maturity, you may get less than what you put in. It's always best to plan ahead and align your CD maturities with dates where think you will need the money.

For example, if you always pay taxes in April or take a family vacation in December then having CDs mature around those times may make sense for you.

Be careful to notice any special features of the CD before purchasing. Some CDs are "callable," meaning they can pay you back early if they desire. Callable CDs benefit the bank if interest rates go down. In that case, the bank will call in callable CDs.

You will get your money back, but now you are holding cash that has to be reinvested at the current lower interest rates. It benefits the bank because they can issue new CDs that pay a lower rate.

Callable CDs typically pay a higher interest rate because you are not guaranteed to receive that interest rate until the maturity date. With a non-callable CD you know you'll get the stated amount of interest as long as you hold the CD to maturity. 

Again, look at Internet banks. They often have higher rates for CDs. Some also have creative terms that allow you to invest more into the CD a few times during the term, for example.

U.S. Treasury Issued Securities

Government Securities
Government issued securities are safe because they are backed by the faith and credit of the U.S. government. Peter Gridley / Getty Images

Investments issued by the U.S. Government are considered very safe. These include Series EE/E or I Savings Bond as well as Treasury BondsNotes, and Bills. You can purchase these safe investments by opening an account directly with the Treasury and investing as little as $25 for savings bonds and as little as $100 for Treasury Bonds, Notes, and Bills.

What Are the Benefits?

The United States government has what's called "full faith and credit" for its ability to repay investors of issued securities, and has a two hundred plus year history of doing so. It can do this by selling more securities, collecting taxes, or printing more money. The U.S. economy is large enough that other countries also invest in U.S. securities because they understand the fluctuations of the dollar's value over time.

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 specified maturity date, you can still get a fair market price when you sell them.

There are a wide variety of investments available, ranging from bills, notes, bonds, 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.

Interest on Treasury securities is exempt from state and local income taxes but is subject to federal income taxes.

What Are the Drawbacks?

Probably the only drawback to government issued securities is the low return on your investment. Safety comes at a price. Unlike a CD or bank account where these companies compete to get your money, the U.S. government does not run "teaser rates" or any other special deals for opening a new account.

Rising inflation and rising interest rates have varying effects on different types of government bonds. Depending on the type of government bond you own if you sell it before maturity, you could get back less than the original amount you invested.

Money Market Mutual Funds

Bank vault with open door & grill (B&W)
Tipp Howell / Getty Images

Money market mutual funds are a popular cash management tool, and although they are not as safe as a bank savings account or certificates of deposit, they are still considered a secure place to park cash.

What Are the Benefits?

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 that 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. 

Because of the short-term nature of the fund objective, investors generally have the ability to put money in or take money out any time.

However, some money market funds have higher minimums or limited liquidity. This allows the fund a more consistent use of investor money, and thus funds with higher minimums or limited liquidity often pay a slightly higher yield. 

What Are the Drawbacks?

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 $1.00 per share, it is not guaranteed.

When interest rates are low, it is more difficult for a money market fund to produce a better income yield for investors. It is mainly due to the costs of operating the fund. There have been examples recently in the U.S. where the yields were .01 percent and some even "broke the buck" meaning the share price went below $1.00; such losses were passed along to investors.

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) of up to $250,000 limits for cash. This coverage is different from FDIC because it covers your money if the brokerage firm goes out of business, but it does not insure the value of your investment against market losses.

Fixed Annuities

Couple talking to financial advisor in living room
Hero Images / Getty Images

A fixed annuity is a contract with an insurance company. You give them your money to manage, and in exchange, they pay you a guaranteed return. Usually, the interest on a fixed annuity is tax-deferred. Fixed annuities are usually not liquid, which means you will not have easy access to the funds like you do with a bank savings account or money market account.

What Are the Benefits?

Fixed annuity investors lock in a rate of return. You know what you will get and when you will get it. This may sound like a CD, but it is different. Your rate may be slightly better than a CD, but it is dependent on the financials of the insurance company that issues the annuity.

As annuities are issued by insurance companies, they are monitored by the State Insurance Commissioner and required to keep large reserve accounts. 

Because insurance companies are regulated by State statutes, if the insurance company goes bankrupt, the State will step in with their support and guarantee funds to settle claims per allowed limits. You can get more information at the National Organization of Life and Health Insurance Guarantee Association website and click on your state's association.

What Are the Drawbacks?

Annuities suffer the same concern with safe investments, that returns will not keep up with inflation. Having a guaranteed and safe return on part of your retirement investments is a good idea, but keep in mind there can be hefty penalties and taxes to get your money out of an annuity early. Additionally, annuity investments are typically offered by insurance companies, and you run the risk of the insurer filing bankruptcy and never paying out on your policy.

Finally, some financial advisers would rather you use safe investments found in the investment market instead of the insurance market because the annuity may have higher costs associated with administering the product than other investment types.