Invest Wisely: Strategies For Risk-Free Returns

Investing is inherently risky, but some options are safer than others. Generally, the safer the investment, the lower the returns. However, there are several low-risk options for investing your money.

High-yield savings accounts, money market funds, certificates of deposit, and cash management accounts are all insured by the Federal Deposit Insurance Corporation (FDIC) and are therefore considered very safe.

Treasury notes, bills, and bonds are backed by the US government and are another low-risk option.

Other low-risk investments include dividend-paying stocks, preferred stocks, and annuities.

It's important to remember that even within these categories, there are varying degrees of risk, and what's considered safe differs from person to person. Additionally, low-risk investments may have lower returns and be less liquid, so it's essential to consider your financial goals, risk tolerance, and investment horizon before deciding.

High-yield savings accounts

Benefits of High-Yield Savings Accounts

One of the biggest advantages of high-yield savings accounts is the higher rate of return on your deposits. The interest compounds daily or weekly, so even a small initial deposit can grow into a substantial sum over time. Additionally, these accounts are generally insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), up to $250,000. This means that your money is as safe as it would be in a regular savings account. High-yield savings accounts also offer more flexibility than other investment options, as you can usually withdraw and transfer funds without any penalties. Many of these accounts also come with no monthly fees and low (or no) minimum deposit or balance requirements.

Drawbacks of High-Yield Savings Accounts

One of the main drawbacks of high-yield savings accounts is that interest rates are variable and can change at any time. Additionally, while your money will grow faster than in a traditional savings account, it may not keep up with inflation over the long term. Fees and minimum balance requirements can also eat into your returns, and there may be limits on the number of withdrawals or transfers you can make each month. Most high-yield savings accounts are also offered by online-only financial institutions, so if you prefer in-person banking, this could be a disadvantage.

How to Choose a High-Yield Savings Account

When choosing a high-yield savings account, look for accounts with high interest rates and low service charges. Avoid accounts with monthly fees, and consider those that offer no minimum balance requirements. Many smaller institutions, including online banks and apps, often feature good rates and low deposit requirements, so don't be afraid to look beyond the larger, well-known banks.

Examples of High-Yield Savings Accounts

• Western Alliance Bank High-Yield Savings Account: Offers one of the highest savings rates with a $1 minimum deposit and no monthly fees.
• LendingClub LevelUp Savings: Provides a free ATM card and no ATM fees, along with a competitive APY and no monthly fees or minimum balance requirement.
• Newtek Bank Personal High Yield Savings: Earn a high APY with no minimum deposit and low minimum balance, along with a business checking account and ATM access.
• UFB Portfolio Savings: Offers a competitive APY on all balance tiers, no monthly fees, and no minimum deposit or balance requirement. Includes a free ATM card and unlimited withdrawals.
• Synchrony Bank High Yield Savings: Features no monthly fees or minimum deposits, up to six free withdrawals or transfers per statement cycle, and ATM fee refunds of up to $5 per cycle.
• Marcus by Goldman Sachs High-Yield Online Savings: Provides no fees, no minimum deposit requirement, and easy mobile access, along with a strong APY and unlimited withdrawals or transfers.

Money market funds

Overall, money market funds are a good option for those seeking a low-risk, short-term investment with a stable and regular income.

Short-term certificates of deposit

CDs offer a fixed interest rate over a set period, typically ranging from six months to five years, though shorter and longer terms are available. During this time, you'll earn interest on your deposit, which is often higher than the interest on a traditional savings account. At the end of the term, you can withdraw your initial deposit along with the interest earned, or you can roll the entire amount into a new CD account.

CDs are a good option if you don't need immediate access to your funds and want a guaranteed, competitive return over a specific period. They are also useful if you're saving for a short-term goal, like a vacation or new furniture.

It's important to note that withdrawing money from a CD before it matures can result in an early withdrawal penalty. You may lose some or all of the interest you earned, and some banks may also charge a fee or decrease your principal. Therefore, it's crucial to read the rules and compare CD rates before investing.

Additionally, short-term CDs typically offer lower interest rates than long-term CDs. Banks often reward savers who choose long-term CDs with higher rates. However, short-term CDs provide the advantage of not locking your money away for years.

When choosing a CD, consider the maturity term and how well it aligns with your financial goals. Shop around to find the best CD rates for the term you're seeking.

Cash management accounts

CMAs bring together checking and savings features, often with added investment options, under one roof. They are offered by non-bank financial service providers, such as brokerage and investment firms, and typically pay interest on deposits. One of the key advantages of CMAs is that they offer much higher FDIC insurance limits than traditional bank accounts, with coverage of up to $8 million for individual accounts. This is achieved by partnering with multiple banks behind the scenes and sweeping customers' cash into bank accounts, allowing these banks to extend FDIC coverage.

Who Are the Main Providers?

Some of the main providers of cash management accounts include Wealthfront, Betterment, Empower, Vanguard, Fidelity, Charles Schwab, Interactive Brokers, and SoFi. These companies offer a range of features, including high APYs, fee-free ATMs, debit cards, mobile check deposit, bill pay, and more.

Pros and Cons

In summary, cash management accounts can be an attractive option for those seeking higher interest rates on their savings and the convenience of having checking, savings, and investment features all in one place. However, it's important to consider the potential drawbacks and compare the features offered by different providers to find the best fit for your financial needs.

Dividend-paying stocks

When choosing a dividend-paying stock, it is important to look beyond the dividend yield. A high dividend yield can be a red flag. It could indicate that the company is going into debt to pay dividends, or that the company's share price is falling. A company that pays out too much in dividends may not have enough left over to invest in growth.

If you are looking for dividend-paying stocks with a low risk of cutting dividends, consider the dividend aristocrats – a group of S&P 500 stocks that have increased their dividends every year for at least 25 years.

Frequently asked questions