Are you a potential investor or a savvy investors looking to achieve higher returns from investment1? If yes, the following money market instruments may be your sure bet for you:
Bank savings accounts
Bank savings accounts are not tied to investment risk. You are able to withdraw your savings as desired.
A bank savings account is a type of account designed to hold money that you do not need immediate access to. When contrasted with checking accounts, bank savings accounts tend to pay a slightly higher interest rate. These days, you can open one in person, online, or over the phone. The starting values are normally low, and banks will allow you to have multiple accounts, for example, for minor children, to help you save for short or intermediate term financial goals.
The main benefit of a savings accounts is the safety of your money. All savings accounts are covered by the National Deposit Insurance Corporation (NDIC) who will insure your deposits. If the bank has failed and is not able to provide you with your money, NDIC will make arrangements for you to get your money back.
The other nice benefit of these accounts is flexibility and easy access to your money. You can put in small or large amounts often and take your money back out when you need to. Bank savings accounts are ideal for emergency funds for unexpected life events such as a job loss or prolonged illness.
(or rent) for your money. The interest rates earned on bank savings are likely to be lower than inflation rates.
The interest you earn on savings accounts will be subject to income taxes, too. (Unless your savings account
2 Certificates of Deposit (CD’s)
Certificates of Deposit have a specific maturity date. At maturity, the face value is returned with any accrued interest owed. Certificates of Deposit (CD’s) are one of the safest investment vehicles out there. If you want to be at the low-end of the risk/reward spectrum, CD’s might be the right choice. The typical minimum CD investment is N50,000 and any amount after that in N50,000 increments in most banks. There are some banks which will start lower and others that have N50,000 minimums.
The biggest differences with CD’s compared to bank savings accounts is that CDs will pay higher interest rates. The higher rate is compensating you for agreeing to leave your money there until the maturity date, which is when the bank returns your money plus interest. If interest rates have fallen during this holding period, then you are likely getting a better rate of return than you would have gotten in a bank savings account or money market.
When you are shopping for a CD, you can pick ones that mature near a date where you think you will need your funds.
Treasury issued securities
Government issued securities are safe because they are backed by the faith and credit of the government. Investments issued by the government are considered very safe. These include treasury bonds, notes, and bills.
The government has what’s called “full faith and credit” for its ability to repay investors of issued securities, and has a two hundred plus. It can do this by selling more securities, collecting taxes, or printing more money.
Because people want to own these types of investments for their high degree of security, there is always a market to sell your government investments. It means that if you are not able to hold onto them until the specified maturity date, you will still get a fair market price when you sell them.
Interest on treasury securities is exempt from state and local income taxes but is subject to federal income taxes.
Probably the only drawback to government issued securities is the low return on your investment.
Rising inflation or rising interest rates have varying affects on different types of government bonds. Depending on the type of government bond you own if you sell it before maturity, you could get back less than the original amount you invested.
Money market accounts
Money market funds are a popular cash management tool, and although they are not as safe as a bank savings account or certificates of deposit, they are still considered a secure place to park cash.
The primary benefit of a money market fund is the active management of very short term investments. A mutual fund company has professional researchers, analysts, and traders that manage a large group of investors’ money with the goal of doing better than what the Treasury yield will do in the same period. Bear in mind; we are talking about very small increments of return.
Because of the short term nature of the fund objective, investors generally have the ability to put money in or take money out any time. However, some money market funds have higher minimums or limited liquidity – this allows the fund a more consistent use of investor money, and thus funds with higher minimums or limited liquidity often pay a slightly higher yield.
A common theme with safe investments is the inability to compete with long term inflation rates.
When interest rates are low, it is more difficult for a money market fund to produce a better income yield for investors. It is mainly due to the costs of operating the fund. There have been examples recently in the U.S. where the yields were .01% and some even “broke the buck” meaning the share price went below $1.00; such losses were passed along to investors.
A fixed annuity is a contract with an insurance company. You give them your money to manage, and in exchange, they pay you a guaranteed return. Usually, the interest on a fixed annuity is tax-deferred. Fixed annuities are usually not liquid, which means you will not have easy access to the funds like you do with a bank savings account or money market account.
Fixed annuity investors lock in a rate of return. You know what you will get and when you will get it. This may sound like a CD, but it is different. Your rate may be slightly better than a CD, but it is dependent on the financials of the insurance company that issues the annuity.
Because insurance companies are regulated by State statutes, if the insurance company goes bankrupt, the State will step in with their support and guarantee funds to settle claims per allowed limits. You can get more information at the National Organization of Life and Health Insurance Guarantee Association website and click on your state’s association.
What Are the Drawbacks?
By now, you should be aware of the ongoing concern with safe investments – that returns will not keep up with inflation. Having a guaranteed and safe return on part of your retirement investments is a good idea, but keep in mind there can be hefty penalties and taxes to get your money out of an annuity early.