When you hear about “risk-free” investments, it sounds like a great way to keep your money safe and earn some interest. But the truth is, even the safest investments can secretly cost you money. They might not seem risky, but over time, they can lose their value or not keep up with inflation. Let’s look at 10 “safe” assets that might not be as good as they seem.
1. Savings Accounts
Savings accounts are a common place to keep your money safe. They’re insured by the FDIC, so you won’t lose your principal. But the interest rates are usually very low, which means your money isn’t growing much.
How to Do It:
- Check the Interest Rate: Look for a high-yield savings account that offers a better interest rate. Some online banks offer rates around 4% to 5%, which is better than the average.
- Avoid Fees: Make sure your account doesn’t have monthly fees that can eat into your interest.
- Compare Options: Shop around different banks to find the best deal. Some banks might offer higher rates or better terms.
2. Certificates of Deposit (CDs)
CDs are another way to save money safely. You lock in your money for a set period and get a fixed interest rate. But if you need your money before the CD matures, you’ll face penalties.
How to Do It:
- Choose the Right Term: Pick a CD term that matches your financial goals. Shorter terms offer less interest, but you can access your money sooner.
- Ladder Your CDs: Split your money into multiple CDs with different maturity dates. This way, you’ll have access to some funds sooner and can take advantage of higher rates over time.
- Watch for Penalties: Understand the early withdrawal penalties before you invest. Some banks offer no-penalty CDs, but they usually have lower rates.
3. U.S. Treasury Bills, Bonds, and Notes
Treasury securities are backed by the U.S. government, making them very safe. But the returns can be low, especially for short-term T-bills.
How to Do It:
- Understand the Types: T-bills are short-term (up to one year), T-notes are medium-term (2 to 10 years), and T-bonds are long-term (20 to 30 years). Each has different interest rates and maturity dates.
- Buy Directly: Use the TreasuryDirect website to buy these securities directly from the government and avoid broker fees.
- Consider Inflation: While Treasuries are safe, they might not keep up with inflation. Look at the current rates and compare them to inflation rates to see if they’re a good deal.
4. Municipal and High-Quality Corporate Bonds
These bonds can offer higher interest rates than Treasuries, but they come with more risk. Municipal bonds fund public projects, while corporate bonds depend on the company’s financial health.
How to Do It:
- Research the Issuer: Look into the financial health of the municipality or company issuing the bond. Ratings from agencies like Moody’s or Standard & Poor’s can help.
- Diversify: Don’t put all your money into one bond. Spread your investments to reduce risk.
- Watch for Fees: If you’re using a broker, be aware of any fees or commissions that can cut into your returns.
5. Bond Funds
Bond funds invest in a variety of bonds, spreading out your risk. But they can also come with management fees and the risk of losing money if bond prices drop.
How to Do It:
- Choose a Fund: Look for a bond fund with a good track record and low fees. Index funds that track a bond index can be a good option.
- Understand the Risks: Bond funds can lose value if interest rates rise or if the bonds in the fund default.
- Monitor Performance: Keep an eye on the fund’s performance and fees. If it’s not doing well, consider switching to a different fund.
6. Money Market Funds
Money market funds are ultra-safe and highly liquid. They invest in short-term debt securities like T-bills and CDs. But they also offer lower returns than other investments.
How to Do It:
- Look for High-Yield Funds: Some money market funds offer better returns than others. Shop around to find the best rates.
- Check the Fees: Even small fees can add up over time. Choose a fund with low management fees.
- Use for Short-Term Goals: Money market funds are good for short-term savings goals or as a temporary holding place for cash.
7. Treasury Inflation-Protected Securities (TIPS)
TIPS are designed to protect against inflation. The principal adjusts with inflation, and you get fixed interest payments. But if inflation is low, they might not perform as well.
How to Do It:
- Understand the Adjustments: TIPS adjust based on the Consumer Price Index. If inflation is high, your principal and interest payments will increase.
- Buy Directly: Use TreasuryDirect to buy TIPS and avoid broker fees.
- Consider the Timing: TIPS can be a good investment if you expect inflation to rise. But if inflation stays low, they might not be as attractive.
8. AAA Bonds
AAA-rated bonds are considered very safe because they have a low risk of default. But they also offer lower returns than riskier bonds.
How to Do It:
- Research the Rating: Make sure the bonds you’re looking at have a high credit rating. AAA is the highest, but even AA or A-rated bonds can be safe.
- Compare Returns: Look at the interest rates for AAA bonds compared to other investments. Sometimes, the difference in returns can be significant.
- Diversify Your Portfolio: Don’t put all your money into one type of bond. Mix in other investments to balance risk and return.
9. Annuities
Annuities promise to pay you a fixed amount of money for a set period or for life. They can be a good way to ensure a steady income in retirement. But they can also come with high fees and inflexibility.
How to Do It:
- Understand the Terms: Read the contract carefully to understand the payment terms, fees, and any penalties for early withdrawal.
- Shop Around: Different companies offer different terms and fees. Compare several options before you decide.
- Consider Your Needs: Think about how much income you’ll need in retirement and how long you’ll need it. An annuity might be a good fit if you need a steady income for life.
10. Real Estate Investment Trusts (REITs)
REITs invest in real estate and pay out dividends to shareholders. They can offer good returns and diversification. But they’re not without risk.
How to Do It:
- Choose the Right REIT: Look for REITs that invest in stable properties with good rental income. Some REITs focus on commercial properties, while others invest in residential or industrial real estate.
- Monitor the Market: Real estate values can fluctuate, so keep an eye on the market. If property values drop, your REIT’s value might also drop.
- Diversify Your Holdings: Don’t put all your money into one REIT. Spread your investments across different types of REITs to reduce risk.
Conclusion
While these investments are considered “safe,” they can still lose you money over time. Low returns, fees, and inflation can all eat into your savings. To make the most of your money, it’s important to understand the risks and returns of each investment. Always do your research and consider talking to a financial advisor to help you make the best choices for your situation.
By understanding these points and taking action, you can make smarter decisions about where to put your money. Always consult with a financial advisor to ensure you’re making the best choice for your situation. Happy saving!
