The investment industry offers several "safe money" alternatives under the umbrella of "short-term investments," "temporary investments," or, in the Wall Street lexicon, "cash equivalent investments," or just plain "cash."
These types of investments pay interest with little or no risk that you'd lose principal. With a couple of exceptions, you can also take your money out immediately with no loss of principal.
Some examples include certificates of deposit, money market accounts, money market funds, and U.S. Treasury bills.
There are a lot of reasons why you should have at least some of your money invested in these types of accounts without having to worry about the money losing value or suddenly becoming inaccessible.
For example, it is a good idea to have a few months' living expenses in an emergency fund where you can easily access it. If you're retired, you might want to keep enough of your retirement investments in safe securities to fund up to two years' worth of living expenses. This will prevent you from having to sell other investments at a loss if the market continues to decline.
Having money in these investments also makes it easy to meet foreseeable short-term cash needs that can't be paid for out of your job income. These can include college tuition, home improvements, a car, or another big-ticket item.
Here are three essentials to consider when deciding where to put your safe money:
1. Safe. Whether fleeing the stock market or temporarily setting money aside to be used in the near future, you don't want to risk losing your principal.
2. Accessible. You want to be able to get your hands on the money within a day, ideally at no cost or at minimal cost.
3. Decent interest. You want to earn an attractive rate of interest. Since the interest rate paid (the "yield") on safe investments varies considerably, doing some comparison shopping will be rewarding, particularly when the interest paid on these investments is as low as it is now.
Finding the Best Returns
As opposed to stocks and bonds, safe investments are pretty straightforward. The price you pay for safety and liquidity is a lower rate of interest than bonds and other longer-term investments yield. And while cash-equivalent investments hardly offer breathtaking returns, you might as well earn as much as you can on them. With a little bit of effort, you can make the most of these otherwise mundane investments. Here are some suggestions:
Shop for CDs. If you're in the market for a CD, a little shopping around—even outside your hometown—could reap some rewards. First, compare rates among banks in town. If you have a broker, check with him or her about CD offerings the brokerage firm may have. Finally, several Web sites list the highest-yielding CDs in the country, including www.bankrate.com. Remember, as long as the issuing bank is FDIC-insured (or, if offered by a credit union, is backed by credit union insurance) you really shouldn't care where you invest in your CD. You just want the best yield.
Compare yields on money market funds. If you have an account with a mutual fund or a broker offering several different kinds of money market funds (taxable and tax-exempt, for example), be sure to compare yields to make sure the one you select offers the best after-tax return. Of course, you also have to be comfortable that the money fund meets your safety requirements. This may require you to periodically compare the returns among various money market funds, but if you can improve your return by periodically switching among money market funds, you'll have more money in your pocket.
I recently compared money market fund yields among several different financial companies and was surprised at the differences. Some companies are paying considerably higher interest than others. If you have a lot of money residing in money market funds, you might want to shop among the big financial companies to see if you might benefit from switching from a company offering a paltry yield to one with a higher yield.
Save on Treasury bill purchases. Although current convoluted market conditions have driven Treasury bill yields way down, this won't last forever. If you regularly buy T-bills, consider buying them directly from the U.S. Treasury at no cost. Simply visit www.treasurydirect.gov for information and applications for buying Treasury securities online. If you don't want to go through the effort of buying T-bills directly online, compare fees between your bank and your brokerage firm.
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Also of interest: What are my odds of a flush retirement? >>
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