A Comparison of Low-Risk Savings and Investment Options

With the recent major decline of the stock market, many investors are looking for safe places to stash their money until the market stabilizes and begins a recovery. Others have decided they simply can no longer afford the risk associated with investing in the market. If you’re looking for a guaranteed rate of return on your money or another very low risk investment, there are some different options to choose from. The best investment vehicle for you might vary from person to person, but there are some good options for those who want to reduce the amount of risk they’re taking on their money.

Here are the options that you might consider:

High-Yield Savings Accounts - These are special savings accounts, typically offered through the internet, which offer a much higher interest rate than what you would normally receive if you walked into a branch of one of the major banks. These accounts are FDIC insured so you can be assured that your money is completely safe. Typically, they’ll be offered by a branch of a larger bank. For example, the First National Bank of Omaha markets their online savings accounts through a website called “FNBO Direct.” The highest interest rates you’ll be able to find in these accounts right now is 2.6% to 2.8%.

Municipal Bond Funds – Municipal bond funds are great for investors with high incomes, because the money they earn is completely tax free. If you’re in the 28% tax bracket or above, investing in short term or limited term municipal bonds is a great option. Vanguard’s Limited term Municipal Bond Fund has average 2.92% over the last 5 years, which would be the equivalent of 4% in a taxable fund. These investments will vary a bit from day to day, but over the course of the year, they will be very stable.

Certificates of Deposit – Certificates of Deposit and high-yield savings accounts are very comparable, as they are both FDIC insured. The difference lies in the rate of return you will get. Typically, it’s a good idea to get a CD when rates are trending downward, because you can continue to receive the same interest rate even when the prevailing interest rate of the market is much lower. With high-yield savings accounts, your interest rate will match what’s in the rest of the market.

Money Market Accounts - Money market accounts are just about as safe as FDIC insured money, but there’s not an official guarantee. The fed did move to temporarily add FDIC insured to money market accounts, but that will be rescinded in the near future. Currently BankRate lists 1.65% as the average national rate. Some of the best money market accounts are offering 2.4% to 2.6% on their money. These accounts are great if you have a lot of money to invest and need the money to be liquid. Some high-yield savings accounts will have deposit limits, but most money market accounts won’t.

If you’re looking for a very safe place to store your money, any of these options will serve you fine as long as you’re putting them in a bank or investment company that is at the top-end of whatever the market is offering. If you have the option of putting the money in a FDIC or NCUA insured account, it’s definitely better than not having that insurance, but if you make a lot of money and are in a high tax bracket, typically municipal bond funds are just about the best place to go.