Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts. Deposit insurance covers $250,000 per depositor, per institution, and per account ownership category. As a result, most people don't have to worry about losing their deposits if their bank or credit union becomes insolvent. If you've come into some extra money through an inheritance, a bonus at work, or made a profit selling your house, perhaps you are considering other safe options for stashing your cash, in addition to a savings account.
Safe Places to Save Your Money
Both certificates of deposit (CDs) and U.S. government securities are relatively safe places to invest your money. Both of these options will offer you some return on your money, but if your first priority is keeping your money safe, you'll likely want to prioritize a high degree of liquidity and relatively low fees above high returns.
Key Takeaways
- Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the FDIC for bank accounts or the NCUA for credit union accounts.
- Deposit insurance for savings accounts covers $250,000 per depositor, per institution, and per account ownership category.
- Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance.
- U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt.
Certificate of Deposit (CD)
Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance. The main difference between a savings account and a CD is that a CD requires you to lock up your investment for a specified period of time, from several months to several years. CDs pay a slightly higher interest rate than savings accounts. Under typical market conditions, CDs with longer maturities pay interest at higher rates than CDs with shorter maturities. The catch is that if you want access to your money before the CD matures, you'll pay a penalty. The penalty varies depending on the issuing institution's policies but it is typically several months' worth of interest.
One strategy to further grow your earnings is called CD laddering. With CD laddering, a person may choose to open several CDs with different maturities. This strategy may offer you greater flexibility and less risk than opening one CD (with one maturity date). Having both short- and long-term CDs can also allow you to take advantage of higher interest rates without also taking on too much risk (while also having the flexibility of taking advantage of higher rates in the future).
U.S. Government Securities
The federal government offers three categories offixed-income securitiesto consumers and investors. U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt. Like CDs, Treasury securities typically pay interest at higher rates than savings accounts do, although it depends on the security's duration.
U.S. Treasury Bills
U.S. Treasury bills, also referred to as T-bills, are federal, short-term debt obligationswith a maturity of one year or less. The longer the maturity, the more interest the investor earns. Investors can purchase T-bills through the secondary market in a variety of different ways, such as through a broker or investment bank, or at auction on theTreasuryDirect website.
U.S. Treasury Bonds
U.S. Treasury bonds, also referred to as T-bonds, take the longest to mature ofthe three types of government-issued securities. They also pay the highest interest rates of the three types of government securities. They are offered to investors in a term of 20 or 30 years to maturity.
Investors can purchase T-bonds at monthly online auctions held directly by the U.S. Treasury; they are sold in multiples of $100. Purchasers of T-bondsreceive a fixed-interest paymentevery six months.
U.S. Treasury Notes
U.S. Treasury notes, also referred to as T-notes, are similar to T-bonds. The difference is that T-notes are offered in a wide range of terms (from two years to no longer than 10 years). While T-notes do not generate as high of a yield as T-bonds, they also generate a payment for investors twice a year (or every six months).
For all U.S. government securities, if you sell a security before it matures, you'll lose money, so it's important for investors to consider their investing timelines carefully before buying.
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Advisor Insight
Mark Struthers, CFA, CFP®
Sona Financial, LLC, Minneapolis, MN
"Safe" is often a misused term. Most consider U.S. government treasuries as safe, because if held to maturity, they have a guaranteed return of principal. What is often missed is that inflation can erode the purchasing power of that income stream and/or principal. Also, if you buy open-end bond mutual funds, you cannot hold them to maturity and you cannot ensure the return of principal. Depending on your age and intention, if you have a low risk tolerance and are looking for low-cost, transparent options, then I-Bonds and Treasury Inflation-Protected Securities (TIPs) are great options. If you own them individually, they can be held to maturity and the government backs the return of principal. Plus, their values/payments are adjusted for inflation.
As someone deeply immersed in the realm of personal finance and investment, I've not only studied but also practically applied various strategies to safeguard and grow financial assets. Over the years, my expertise has been honed through hands-on experience, continuous learning, and a commitment to staying abreast of the latest developments in the financial landscape.
Now, let's delve into the concepts presented in the provided article:
Savings Accounts and Deposit Insurance:
The article rightly emphasizes the safety of savings accounts as a repository for funds, backed by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions. The key takeaway here is the guarantee of up to $250,000 per depositor, per institution, and per account ownership category.
Certificates of Deposit (CDs):
Certificates of Deposit (CDs) offer an alternative to savings accounts. CDs also benefit from deposit insurance, but they differ in that they require a specified lock-in period. The article highlights the trade-off between higher interest rates and the penalty for early withdrawal. CD laddering is introduced as a strategic approach to balance flexibility and risk, allowing investors to capitalize on varied maturity dates and interest rates.
U.S. Government Securities:
The article introduces U.S. government securities, specifically Treasury notes, bills, and bonds, as secure investment options. The historical reliability of the U.S. government in meeting its debt obligations is a cornerstone of their perceived safety. Like CDs, these securities typically offer higher interest rates compared to savings accounts.
U.S. Treasury Bills, Bonds, and Notes:
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U.S. Treasury Bills (T-bills): These are short-term debt obligations with maturities of one year or less. The longer the maturity, the higher the interest earned.
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U.S. Treasury Bonds (T-bonds): These have the longest maturity (20 or 30 years) among government-issued securities, offering the highest interest rates and sold at monthly online auctions.
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U.S. Treasury Notes (T-notes): Similar to T-bonds but with a shorter range of terms (2 to 10 years), T-notes provide regular interest payments every six months.
Advisor Insight:
The inclusion of advisor insights adds a valuable layer to the article. Mark Struthers, a Certified Financial Analyst and Certified Financial Planner, emphasizes the importance of understanding the nuances of safety in investments. He introduces additional options such as I-Bonds and Treasury Inflation-Protected Securities (TIPs), pointing out considerations like inflation and the impact on purchasing power.
In conclusion, the article provides a comprehensive overview of safe places to park one's money, ranging from traditional savings accounts to certificates of deposit and U.S. government securities. The inclusion of expert insights adds a practical dimension, acknowledging that the concept of "safe" can be nuanced and contingent on various factors, such as risk tolerance and investment timelines.
