Let me tell you a secret:
There’s no such thing as foolproof, you’ll-never-lose-a-penny-no-matter-what investments.
We live in a world full of bankruptcies, foreclosures and other economic catastrophes. Even stashing cash under your mattress means nothing, if it’s apt to float away. (Ask the survivors of Hurricanes Katrina and Sandy about that. They know.)
Unfortunately, the spots that give you the safest home for your hard-earned cash also tend to produce a miniscule return. You need to put your money somewhere. What to do?
*Stop…and decide how much risk you want to take. Unless you want your money to make snail’s progress, you’ll have to take some chances. But you should also keep a percentage reasonably safe, using some of the suggestions below. As you head toward retirement, that ‘safe’ percentage should increase appreciably.
*Look…at every publication on practical investing. Money and Forbes are a good place to start. (This guy recommends Kiplinger and Inc., among others. Inc. is especially helpful if you have or are interesting in starting a business.)
*Listen…to financial podcasts, tv shows, anything that can give you a wider view of today’s market. Don’t miss out on online seminars from companies like TD Ameritrade; just remember that their bottom line is sales — not your ultimate good. Financial pundits like Suze Orman and Dave Ramsey may be giving out free advice — but they also have products they wish you would buy.
(Pretty Good) Ways to Save Safely
*Savings Accounts. $250,000 — that’s how much the FDIC protects your money in a savings account. They cover bank CDs and money markets, too… see here for what they don’t. (The UK and other countries have similar protections.) You’ll generally have to keep a minimum amount in the account, if you expect not to pay any monthly fees.
Credit unions, which used to be famous for their free checking/savings accounts, have generally followed suit. They, like banks, though, are offering bare-minimum interest rates. Bare comfort…but at least you can pull cash out whenever you need it.
*Certificates of Deposit. CDs were outstanding ways to make a buck, when they ran at higher rates. They’re still good, for holding funds you’ll need for future purchases. CIT Bank has one of the best rates around — but it’s only 2.30%, and your money will be held for five years. (You also need to sock away $100,000 to get that rate.) A good comparison of current highest CD rates are here.
*Money Market Funds. These generally have higher rates than savings accounts. Your money is generally protected, too (double-check). It’s also still easy to pull money and pay bills from your account, when needed. (As long as you stick to the limited number of transactions, that is.)
The bad part — interest rates are still less than 1%. Find out more here.
*U.S. Savings Bonds. When our girls were babies, we began buying a $50 savings bond every month, and kept it up until they started kindergarten. That money eventually paid for both daughters’ first year of college. They’re still easy to buy…but that also means that in most cases, your money is tied up for decades. You can choose from bonds in the I and EE series. (HH bonds are no longer available, though they may still be in some people’s portfolios.) What’s the difference? EE bonds pay a fixed rate until they mature — 30 years. (There are penalties for withdrawing early, and the interest rate starts out lower.) Series I bonds, on the other hand, are split in two — one part, like the EE bonds, is fixed rate. The other part is tied to the inflation rate, and is readjusted every six months.
*Treasury Bonds. Like savings bonds, these are backed up by the full power of the United States — and depending on how you feel about the government, that’s about as safe as you’re going to get. Also, you’ll always get your full face amount back, no matter what. You can start by paying in as little as $100, to begin.
That’s the good news. The bad: interest rates are tiny. Recent auction rates have ranged from a quarter, to as little as half of a percent. Hopefully they’ll improve. Many banks sell Treasuries — but you can also invest in them directly.
*Index Funds. We’ve discussed these before. Other bloggers, like Trent of The Simple Dollar, are also big on index funds — but he splits his percentages: 95% in stock index funds, and 5% in bond index funds. Although they’ve not done as well this year, so far, returns for the Vanguard index funds hovered around 5% each year for the past few years. That’s hardly chump change.
*Dividends. Investing in stocks is always a risk. Stocks that pay out a dividend, however, give you another money to make money. If the stock’s profitable that year, the dividend is a welcome bonus. If you lose, instead, it eases the sting.
*Matching programs. If your employer does this for 401(k)s and other IRA-type plans, and you’re not taking advantage of it — you’re missing out. Invest to the max, and even if you lose money that year, you’ve still made some.
*Paying off debt. Every dollar of debt you pay off automatically earns that money the rate of interest you were paying. Is your home mortgage 7%? Make an extra payment on the principal, and you’ve automatically earned 7%. Don’t use the money, however, that you need for paying your regular bills. Once paid, like CDs, savings bonds and such, that money’s gone for the long term.
Wherever you decide to invest, play it safe, for at least part of your funds. Making money’s great — losing it all isn’t.