Ways to make and save money through my journey to be a millionaire by 30!
Sunday, April 15, 2012
Risk Free Investing
The following is a guest post.
Risk-free investing is a bit of a misnomer. Other than government-insured savings accounts, every investment carries some risk. It may not be the level of risk involved with taking out online loans but there is some risk. However, there are several types of investments where the amount of risk is negligible.
When it comes to no-risk investing, the gold standard is a savings account. These accounts are offered by banks and credit unions and are insured by the U.S. government up to $250,000 per signature per account. That means that if you and your spouse have a joint account, it's covered up to $500,000.
Savings account interest rates, even those that advertise themselves as "high-interest" accounts, are very low compared to other investments. These days, you might have better luck getting no-interest online loans than finding savings accounts with decent interest rates.
One alternative is a certificate of deposit, or CD, which offers slightly higher interest rates and is also government insured.
The drawback to CDs is that you have to agree to tie up your money for a specific period of time, such as one year. If you withdraw money early, you may have to pay a penalty, which can wipe out any interest you have earned. Generally, the longer term you commit to, the better interest rate you will get. There are CD terms that go as long as five years, which is about as long as you would have to pay back online loans.
Although the U.S. doesn't have an equivalent to the British ISA, where anyone can stash away cash tax-free, you can increase your earnings if your savings account or CD is in an individual retirement account.
Of course, a big drawback of an IRA is that the money must stay there until you are at least 59 years and six months and even then you will still have to pay taxes on the money when you withdraw it.
Another very low-risk investment is government bonds. This includes savings bonds, Treasury bills and Treasury notes.
These investments are not government insured, but they are backed by the full faith and credit of the U.S. government. That basically means that for you not to get your money, the U.S. government would have to default, which is something that has never happened.
You also can invest in the bonds of other countries, but you need to make sure you are investing in countries with high credit ratings that are unlikely to default. Canada, Australia and several Western European countries are generally considered safe investments.
Municipal and corporate bonds can also be good low-risk investments. Municipal bonds are bonds issued by cities, states and counties for infrastructure projects, such as new jails or schools.
As long as you invest in bonds from municipalities with high credit ratings, these investments are considered to be very low risk. Another advantage of municipal bonds is that some may qualify to be exempt from federal taxes, which increases your earnings.
Corporate bonds are a bit more risky, because unlike municipalities, which can simply raise taxes if needed to pay back bonds, corporations have to rely on their earnings.
That means a recession or cyclical downturn could put the company in a precarious position. The good news is that bondholders are higher in the payback pecking order than shareholders.
Again, you should invest in companies that have high credit ratings, which indicates they are unlikely to default.
Another way to invest in bonds is to do so through a mutual fund. Mutual funds take funds from many investors and pool them together to invest in certain investments or sectors of the economy.
The funds are managed by professionals, which lessens the risk. A further way to lessen the risk is to invest in conservative funds. The more conservative the bond fund, the less likely it is to lose money. Investigate potential funds and also check out their past performance before investing.
Other "safe" investments
Although savings accounts and government bonds are generally considered the safest investments and about the only ones where the risk of losing some of your investment is zero, there are some other investments where you are unlikely to lose any money.
One of these is a money market fund. Money market funds are similar to savings and checking accounts because they are technically securities and your money is not insured by the government.
Money market funds invest in short-term financial instruments, such as commercial paper, which keeps the risk low. The accounts pay you interest and sometimes a dividend.
These accounts attempt to keep their share values at $1, but there is no guarantee and you can lose some or all of your principal, although this is rare.
Another relatively safe investment is an annuity. Annuities are contracts in which you invest your money with an insurance company in return for a steady stream of income.
Most annuities guarantee you a certain rate of return. However, there are several different types of annuities and they can be very complicated, making them harder to understand than online loans.
For example, some annuities may require your money to sit for several years before you have access to it. Your annuity may also make a lot more than your guaranteed rate of return, meaning you miss out on valuable appreciation.
Annuities are generally considered safe investments. Although they are not insured by the government, the only way you would lose any money is if the insurance company that holds your money became insolvent.
As you can see, there are many choices for safe investments that allow you to earn a small return without risking your principal, which won't leave you broke and needing to apply for online loans.