So, you’re thinking about ways to make money on all that hard-earned cash you’ve been saving, but not quite ready to take a walk on the wild side of high risk investments. Don’t stress. While "low-risk" is usually synonymous with "low return," there are several ways to safely invest your money.
Dropping that extra money into an interest-bearing savings account is one of the safest ways to invest your money. Savings account terms vary from bank to bank, so you should do a little research to see who offers the highest interest rates for the amount of money you're planning to put away. Some will offer higher returns with higher minimum balances, although the interest rates for savings accounts are generally lower than other types of investments. With a savings account you can access the money at any time, and it is federally insured.
Certificates of Deposit
A certificate of deposit, or CD, is similar to an interest-bearing savings account, but with a higher interest return, and penalties for withdrawing your money prior to the term of the deposit. In other words, if you invest in a CD, you won’t be able to access the money early without either paying a penalty, or forfeiting a portion of the interest you have earned. You purchase a CD from a bank or investment firm for a period that can range from six months to a year or more, after which time you are paid back the principal, plus all the accrued interest.
Treasury bills, commonly referred to as T-bills, are a safe investment, but typically offer very little return. To invest in treasury bills, you basically purchase bills at a discounted rate, and hold onto them until they mature to their actual value. In other words, you can buy $1,000 for $990, then be paid $1,000 once the bill matures. Bills can be purchased through brokerage firms, or online through the U.S. Department of Treasury’s Bureau of Public Debt’s financial services company, Treasury Direct.
Money Market Funds
Money market funds are a safer version of mutual funds, and are an ideal investment option for first-time investors. To understand how they work, you first need to understand what a mutual fund is. When an investment firm pools together money from several investors, to invest the large sum into stocks and other securities, it is known as a mutual fund. When the investors direct the money to be invested in a money market fund, the investment firm is required to invest in low-risk securities, such as government securities and certificates of deposit. Dividends are usually lower, as with any low-risk investment, but you are far less likely to lose your principal investment with a money market fund.
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- Beginner's Guide to Money Market Funds
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- The Differences Between Money Market Funds & Money Market Savings Accounts