Safe Investments That Can Help Keep Your Money Secure

When you decide to invest your hard-earned money, it's tempting to look for investment 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, 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, it can be volatile and is never guaranteed.

The following five investments may not bring returns as big as what the stock market could potentially provide, but they could help you keep your money in a place that provides consistent, modest returns to help you in the future.

Bank Savings Accounts

A bank savings account is one place to hold money that you don't need to access too regularly. When contrasted with checking accounts, bank savings accounts tend to pay interest rates that could help you earn money on the cash you stash away there.

You can open a savings account in person, online, or over the phone. The opening minimums are typically low, and banks may allow you to have multiple accounts, such as one for children, to help you save for short- or intermediate-term financial goals.

What Are the Benefits?

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) 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. With a savings account, you can withdraw money up to the federal limit of six times per month. If you go beyond that limit, your bank may charge fees.

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 with a savings account comes little risk—and little reward. The interest rate you can earn on money in a savings account is likely to be lower than inflation rates.

On average, banks pay just 0.09% interest on money in savings accounts. However, there are accounts that pay more. These are known as high-yield or high-interest savings accounts and can help you earn over 1% in interest. These rates can change, though, so there's always the chance that the rate on your account will drop over time.

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.

If you plan to have a savings account, consider an online bank. These banks offer the same level of protection and often offer higher interest rates than a brick-and-mortar bank down the road.

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, and they pay consistent interest for the length of the term.

What Are the Benefits?

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.

Compared to bank savings accounts, CDs could potentially pay slightly higher interest rates. The higher rate compensates you for agreeing to leave your money in the CD until the maturity date, which could be from three months to 10 years.

If interest rates fall while your money is tied up in a CD account, you can be sure that you're still guaranteed the interest rate that was in place when you opened the CD. This means you'll likely get a better rate of return than what's offered in a savings or money market account since the rates on those accounts can fluctuate.

When shopping for a CD, look at online banks and credit unions—they often have higher rates for CDs than brick-and-mortar institutions—and consider when you'll need access to that money. You may need it in one year to help pay for a wedding, or potentially in five years when it's time to send your child to college. Either way, you can choose the term that is right for you.

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.

While CDs often have good interest rates, they can still change fairly quickly. Interest rates can change overnight. For example, if you're thinking about opening a CD today, it's important to know that if you wait, that rate may not be available tomorrow. Look at the best CD rates to ensure you open one with the best rate available for that day.

What Are the Drawbacks?

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 an early withdrawal penalty. The penalty could be as little as one month of interest or as much as 12 months of interest, depending on the CD term.

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.

Be careful to notice any special features of the CD before purchasing. For example, if a CD is "callable" then a bank could cash out your CD before maturity if they so desire. Callable CDs benefit the bank if interest rates go down. In that case, the bank may 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. This 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. 

U.S. Treasury Issued Securities

Investments issued by the U.S. government are considered very safe. These include Series EE/E or I Savings Bonds as well as Treasury bonds, notes, and bills. You can purchase these 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. These different securities come with maturity terms that range from a few days to up to 30 years.

What Are the Benefits?

The U.S. government has what's called "full faith and credit" for its ability to repay investors of issued securities, and has a 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?

The only real 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

Money market mutual funds are a popular cash management tool, and although they are not as safe as bank savings accounts or CDs, they are still considered a secure place to park your cash. With a money market mutual fund, investors purchase a pool of securities that typically provide higher returns than interest-bearing bank accounts.

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 at 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 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. This is mainly 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 "broke the buck," meaning the share price went below $1. These 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). This coverage is different from FDIC because 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.

Fixed Annuities

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?

When you invest in a fixed annuity, you 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 are required to keep large reserve accounts. 

The National Organization of Life and Health Insurance Guarantee Associations or the National Association of Insurance Commissioners are good resources if you're looking for more information about your specific state.

What Are the Drawbacks?

Annuities suffer the same concern with safe investments: Returns may not keep up with the rate of 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. And then there's also the chance that the annuity may have higher costs associated with it than other investments, due to fees involved.

The Bottom Line

Before investing any money, do your research on the various vehicles 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.