Five Safe Investments
These certainly are very tumultuous times, aren’t they? The Dow Jones Industrial Average, S&P 500, and NASDAQ are all around jumped all around. It seemed as though the stock market set single day loss records followed by single day gain records almost every single week! It was a very difficult period for anyone who had any money in the stock market. The market uncertainty, coupled with the discovery of the largest Ponzi scheme ever perpetrated by one of the most trusted and respect names on Wall Street (and since then, half a dozen more), was enough to cause any sane person to dump all their stock market investments and run for the hills.
Well, if you’re going to do that, you might as well know what your options are right? I personally don’t think you should dump everything but if you are looking for some really safe investments, you should consider one of these five options:
High-Yield Savings Accounts
You will no doubt recognize the first and easiest “safe investment” on the list – the high yield savings account. Online savings accounts are nice because they offer a very competitive rate of return while giving you access to your funds. If you have an emergency fund, it pays to have it saved into a high yield savings account because that will maximize your interest earnings while you protect yourself from a potential disaster. You open a savings account at a bank and the funds are FDIC insured.
If you’re uncomfortable with an online bank, consider an high yield savings account at a bank with a brick & mortar branch near you. This gives you the high return of an online bank but access to a real live human being should you need to talk to one. You can also electronically link your online account to your brick & mortar checking account to access your funds almost instantaneously.
Certificates of Deposit
If you have funds that you won’t need for a period of time, consider certificates of deposit. A CD will give you a fixed rate of return, unlike a savings account where the rate can fluctuate, for a specified period of time, known as the CD’s term. When the CD’s term ends (matures), you get your funds back. Should you need your money before the CD matures, you can often pay a small penalty and close your CD prematurely. You trade flexibility for a higher return. If you have an emergency fund, you might want to consider using a CD ladder to help maximize earnings. You open a CD at a bank and the funds are FDIC insured.
Reward Checking Accounts
Reward checking accounts are a special type of checking account some banks offer. You get a relatively high interest rate on your funds as long as you satisfy certain requirements. A common requirement is that you use the bank’s debit card at least ten times a month. Another common requirement is that you have at least one ACH transfer or direct deposit transfer each month. These requirements generate fees for the bank that they use to help pay for the high rate. If you fail to satisfy the requirements of the reward checking account, you earn a nominal interest rate. Like the two other types of bank accounts, your funds are protected by FDIC insurance.
Treasury Securities & Bonds
When the government needs to borrow money, it has a variety of options at its disposal in the sale of Treasury securities and bonds. Treasury products come in two varieties, securities and bonds. Securities are products that you can buy and trade on the secondary market, such as Treasury Inflation-Protected Securities (TIPS). Bonds are products that you can’t buy and trade on the secondary market, you buy them directly from the Treasury, they are non-transferable, and you must redeem them with the Treasury. The end result is that you have a 100% safe investment backed by the full faith and credit of the United States Government and one that might have special tax exempt status. If you want a very in-depth look at the products, as well as how to buy and sell/redeem them, I invite you to check out this post about the Basics of Treasury Securities and Bonds.
Municipal bonds are like the little brother of Treasury Bonds. When a local government needs to raise money, like for a hospital, they will issue municipal bonds that consumer can purchase. These bonds are backed by the full faith and credit of your local government, so the guarantee is less ironclad, but they are still pretty safe. Municipal bonds are nice in that they are federal income tax exempt and, if you live in the municipality, local and state tax free as well. The downsides are that you often need a minimum of $5,000 and it may be difficult to sell your bond if you don’t want to hold it to maturity. If those two downsides aren’t a problem for you municipal bonds are a good safe choice as well.
Some would argue that now, after the market has fallen so dramatically, is the best time to buy. Otherwise would say that this is just the beginning and it’ll only get worse. Regardless of what you believe, some part of your assets, such as your emergency fund, should be in a safe investment where the principal is protected. I hope that one of the five options I’ve listed above will suit your needs and give you a bit of stability in this unstable time.
This is a guest post by Jim Wang, who regularly writes about personal finance at Bargaineering.com.