What does it mean to invest?
The goal when financially investing is to utilize potential assets in order to receive further profits. This concept often compounds meaning the larger the number of assets owned the more profits that can be earned and reinvested. Money for example has the ability to be converted into a cash-flowing asset after a rational transfer of location. Holding large amounts of money in the form of cash or in a checking account will result in 0 returns and will ultimately lose value to the 1%-3% average annual inflation rate. Transferring (aka investing) this money into something with potential returns is understandably a popular alternative.
Why should we invest?
In order to avoid losing value, money can be transferred to a wide variety of investments with varying risks and rewards. Something to be aware of is the high correlation between risk and reward within the investing game and the reality that not every investment will be profitable. Investing money is an excellent tool for building wealth or establishing a healthy retirement fund and there are some reliable investment strategies with low and no risks that can be utilized.
What are some low and no risk investments?
1. Savings Account
A savings account is a tool that everyone should have because of its lack of risk and easy accessibility. Although most savings accounts (especially this year, 2020) offer meager interest rates there are many upsides to holding money in this type of account. The amount of interest varies from bank to bank and can be anywhere from 0.05%-0.6%. These numbers can fluctuate annually depending on the Federal Reserve System but because the money is FDIC insured the money can not lose value. Another advantage of a savings account is that it can be connecting to a checking account allowing money to easily transfer between them. The only noteworthy limitation of the savings account is a common maximum number of withdraws that can be made per month, typically 6.
2. Certificate of Deposit (CD)
A certificate of deposit or CD is similar to the savings account with its FDIC insured no-risk approach. Certificates of deposits also typically have a slightly higher interest rate attached to them averaging between 0.24%-.65%. Alternatively to the savings account the interest rate that is connected to the CD once purchased will not change until the maturity date. This will result in consistent monthly returns within the account. Something to be aware of with this investment strategy is that the money had to be locked into the CD for a predetermined amount of time (6 months, 1 year, 5 years, etc.) and will only be released back with all its earnings after the time expires.
3. Treasury Securities
A Treasury security is another investment strategy with no risks involved because they are backed by the full faith and credit of the U.S. Treasury. The 3 most common types of securities bought are treasury bills (T-bills), treasury notes (T-notes), and treasury bonds (T-bonds). These treasury securities function identically with semi-annual interest returns, only differentiating based on maturity length. T-bills typically mature within a year including 0.09%-0.17% interest, T-notes typically mature within 2-10 years including 0.21%-0.95% interest, and T-bonds typically mature greater than 10 years including 0.95%-1.7% interest. Something notable is that unlike CDs these treasures can be sold before maturity.
4. Money Market Account
A money market account functions similarly to the traditional savings account only really differing in the amount of interest paid and minimum balance required. The interest paid is based on the current interest rates in the money markets which tend to be higher than the interest associated with savings accounts within the bank. With slightly better interest rates money market accounts also come with a larger minimum deposit and balance requirements. In addition, there are typically only around 3 withdraws allowed per month from this account.
5. Money Market Fund
Investing in a money market fund is very different from a money market account because there is a level of risk involved. This type of fund invests in short-term debt instruments such as commercial papers or CDs which can lose value, although unlikely. The average return from a money market fund is around 1%-3% annually which is comparatively high. Although this fund is not FDIC insured like the money market account it still makes solid retunes while remaining incredibly safe.