Are you nearing retirement? How about saving money for specific needs in the next five years? If you’re smart, you know that much of your money is better kept in investments and long-term growth accounts. However, it’s still important to have cash available for large purchases and even emergencies. The only problem is that most savings accounts offer a very low-interest growth rate, so your money just sits there, not really working for you. While a savings account is as low-risk as you can get in terms of money accounts, many people are willing to embrace some risk if it means a better return on their investment.
The good news is that there are several low-risk options available to put that cash where it can grow, yet still be available in the short term when you need it.
Before we get into the specifics, it’s important to understand where you are in your philosophy. Some people want the lowest risk options available, while others are fine with some risk if the return is promising.
For the sake of this article, we’ll split people into these groups:
Those funding very short-term needs, such as a new car or home in the next year or two.
Those with general market distrust.
Those looking for assets with some security to compliment more aggressive portfolios elsewhere.
Let’s look at the best options for each type of person.
1. Short-term savings options.
What’s the best option if you’re funding very short-term needs, like a new car or home in the next year or two?
Truthfully, there aren’t many recommended alternatives to low-yield cash. Generally speaking, the longer you can lock money away, the greater the yield you can expect. Perhaps the best option for this type of saver is to put your money into a CD or a short-duration bond or bond fund. A CD, or Certificate of Deposit, is a low-risk short-term savings tool that offers a slightly higher interest rate than a traditional savings account. CDs are considered low risk because, like savings accounts, they are FDIC-insured up to $250,000. The only difference is that you can access money in a savings account at any time, but CDs limit access during the savings period, often with penalties for early withdrawal. Short duration bonds increase your default risk and don't provide FDIC insurance, but they can sometimes improve your yield slightly. These are either corporate issues or government issues with added risk and return for corporate issues tied to the credit rating of the issuing company.
If you are considering a CD, use a bank aggregator like Bankrate.com to shop CD rates if your timeframe is six months or longer.
Another great option for short-term savings is to search out introductory rates or cash bonuses for opening savings accounts with particular banks. Some banks may offer $250 if you deposit a certain amount and keep it deposited for six months, for instance. This is as good as earning interest. If your short-term savings bucket is relatively low, these types of bonus payouts may be far greater than what you can expect from a higher yielding account or CD.
If you fit into this group of savers, the bottom line is this: don’t take the risk. If it’s tied to a financial goal, don’t sacrifice the goal by being greedy. Even going after 3% over the course of six months isn’t worth the risk of losing out on your house payment or car purchase. Just be smart and keep money liquid and available.
2. Market distrust options.
If you have general market distrust or a low-risk tolerance, there are still some safe options for saving money responsibly.
To start, evaluate your time horizon. If you are looking for returns over 2-3 years, consider structured notes. Structured notes are complex instruments and they can come in a lot of shapes and sizes. With that being said, there are several offerings that yield returns tied so a particular index, such as the S&P 500. Most of these types of notes give you access to the gains of the S&P but with a cap...such as 15% for instance. In exchange, these notes may buffer some of your losses. Meaning, if the S&P index goes down, they may protect you from the first 15% of losses. For instance, if the S&P falls 17%, your return would be a loss of just 2%. Most of these notes are relatively short in duration. Meaning you have to lock your money away for 1-3 years and then the note expires and your original principal plus any gains (or minus any losses) is returned to you. While complex, for those with skepticism about investing in the market, the right type of note may yield some good returns with limited downside risk.
If you are planning to save for 10 years or longer, consider some non-qualified annuities or whole or indexed life insurance. Properly funded 10-pay life insurance products and annuities might pay you 4-5% on your cash with no risk of decline. The biggest catch is that they usually require you to leave your money in the products themselves for some time, often 7-10 years, in order to realize these returns.
Other than the amount of time required to realize the returns, the other caveat on these vehicles is that you possibly could have earned more by putting your money in more aggressive investments. If you’re not going to be investing in an aggressively allocated portfolio, however, then these tools may be the best choice. Plus, they contain the benefits of tax deferral in many cases.
If you either don’t like the rigidity of funding these types of vehicles, or you are unsure of your timeframe, then consider some short-duration bonds or T-Bills. A T-Bill, or Treasury Bill, is a short-term financial investment instrument issued by the U.S. Treasury Department with a maturity of one year or less. A bond is a loan taken out by a company, or the government, but rather than get money from a bank, they get the money from investors who buy the bonds. They typically have a short maturity period after which the bond is paid back with interest.
Be sure to stagger expiration dates on these instruments so you have some cash available at specific times. Focus on AAA-rated corporate issues with short duration (to reduce risk of default) or government bonds. However, you can likely pick up some additional interest above what’s being offered in high-yield savings accounts or CDs.
3. Low-risk options to complement aggressive portfolios.
You might have plenty of high-risk investments, but want to make sure some of your financial outlooks are secure in the event of a market decline. If so, there are a few good options.
Perhaps the best place to start is with indexed annuities. Typical annuities are either fixed, which grow based on a fixed interest amount, or variable, which grow based on a portfolio of investments. Indexed annuities, however, allow you to receive returns based on an index (like the S&P 500), but with protection against losing any money. There is a catch, however. While you will get the returns on an index like the S&P 500, those returns will either have a cap (6%, for instance) or a spread (you would get the returns minus 3%, for instance). The benefit, though, is that if the index declines, you would be credited 0%; meaning, you would not lose any money.
This is just one example of the type of low-risk products that are out there. There are many options just like this available, but the bottom line is that this is an excellent way to protect a portion of your portfolio while you pursue more aggressive strategies in other areas.
Don’t just leave money sitting in your savings account when it could be growing risk-free in one of these short-term investments. Finding alternatives or low to no risk savings options requires some searching and creativity, but, as you can see, there are ways to grow money without assuming market risk. When you’re clear on your financial goals, both short and long-term, you can create a solid strategy to find the best investments. Talk to your financial advisor to discover the best low-risk ways to make your money work for you.