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Getting a Decent Return on Safe Investments

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."

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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.

Next: Where to find the best returns. >>

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