If you want to put some money away that you need to remain safe, cash assets are the lowest-risk assets, or investments, available. Cash assets differ from other asset types, such as stocks and bonds, because cash assets have very little chance, if any, of losing money. The various types of low-risk assets into which you can invest each have specific characteristics.
A savings account at a bank earns interest on the money you deposit. The Federal Deposit Insurance Corp. insures money in a savings account up to a certain amount as long as the bank is insured by the FDIC. With a savings account, you can generally deposit and withdraw any amount at any time without penalty and can usually do so in person or at an ATM. A bank also typically lets you transfer money between a savings account and other accounts within the same bank.
Money Market Deposit Account
A money market deposit account at an FDIC-insured bank is insured by the FDIC and generally pays a higher interest rate than a savings account. Money-market deposit accounts differ from money market mutual funds, which are not insured. You can write checks against a money market deposit account, but you might be limited to a certain number of checks and withdrawals per month. For example, you might have $5,000 in an FDIC-insured money market deposit account and might be able to make up to six withdrawals per month without a penalty.
Certificates of Deposit
A certificate of deposit is a type of account that pays interest on a set amount of money you deposit for a fixed period, such as six months or one year. For example, you might buy a $500 one-year CD that earns 5 percent interest. Like a savings account, a CD purchased from an FDIC-insured bank is insured up to a certain amount. The bank charges a penalty if you withdraw money before the CD matures, so consider whether you will need the money before then if you plan to open a CD.
Treasury securities are investments offered by the U.S. government. These securities include Treasury bills, notes and bonds. You can buy Treasury securities directly from the U.S. Treasury or from a broker. An investor in Treasury securities acts as a lender to the government, which promises to pay interest and the value of the security when it matures. These low-risk assets are guaranteed by the full faith and credit of the U.S. government, which means you are virtually guaranteed to be repaid.
Cash assets pay the lowest interest rates among investments because of their low risk. The primary risk of cash assets is that they might not keep up with inflation, which is the natural rise over time in the prices of everyday items you buy. For example, if you put money in a savings account that pays 2 percent per year and inflation is 3 percent per year, your money would be losing buying power.
- U.S. Securities and Exchange Commission: Beginners' Guide to Asset Allocation, Diversification and Rebalancing
- Personal Financial Literacy, Second Edition; Joan Ryan
- Nolo: Money Market Deposit Accounts and Mutual Funds
- Investor.gov: Certificates of Deposit
- Talking Money -- Everything You Need to Know About Your Finances and Your Future; Jean Sherman Chatzky
- U.S. Securities and Exchange Commission: Treasury Securities
- Photos.com/Photos.com/Getty Images
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- Advantages and Disadvantages of Investing in a Certificate of Deposit
- Explain a Certificate of Deposit
- How Can I Invest Money Quickly?
- What Is the Difference Between a Money Market Fund & a Certificate of Deposit?