Investing is fundamentally made up of two components: risk and reward. Generally speaking, the greater the risk you bear, the bigger the reward you will earn. Inversely, the less risk you bear, the less reward you will earn. A lot of people, especially those who are still starting out, tend to be risk-averse. Meaning they tend to prefer those types of investments that bear little-to-no risk. Fortunately, there are great options for low-risk investments that will fit the risk appetite of these individuals.
In this article, we will briefly talk about our top recommendations for low-risk investments. This list will include high-yield savings accounts, such as UFB Direct high-yield savings accounts, certificates of deposits (CDs), money market accounts, treasury securities, and individual retirement accounts (IRAs).
High-Yield Savings Accounts
This type of investment works very similarly to that of traditional savings accounts. However, unlike traditional savings accounts, high-yield savings accounts typically come with higher interest rates, which means that your money will grow faster. There are numerous advantages to this type of investment. First, they’re insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC covers up to $250,000 per depositor, per bank, and per type of investment.
Second, they’re low-risk. High-yield savings accounts are great at preserving your capital, which means that you won’t have to worry about significant losses in value. And finally, you have access to your funds. The funds inside a high-yield savings account can be easily pulled out in case of emergencies, making it easier for the investor to take back control of the his/her money.
Certificate of Deposits (CDs)
Another great low-risk investment option is CDs. These products are offered by banks and credit unions, and they allow you to earn a fixed interest on your capital for an agreed-upon period of time. In comparison to savings accounts, CDs offer higher potential earnings. However, one disadvantage to investing in CDs is that you will have to leave your money with the bank for the entire duration of the agreement to earn the full interest rate. If you decide to pull out the funds, you may have to pay early withdrawal fees and charges, which could eat into your earnings. CDs are great if you have extra funds that you won’t be needing in the near future.
Money Market Accounts
Once again, this type of investment is very similar to that of savings accounts. Unlike typical savings accounts, however, money market accounts are subject to higher interest rates along with higher balance requirements. This is a great option for those who have quite a bit of money to invest. Money market accounts are also FDIC-insured, which means that investors are covered by up to $250,000 per bank.
Treasury securities refer to government-issued bonds that are backed by the full faith and credit of the government. Because of this, treasury securities are considered to be extremely safe investments. However, they also come with very low-interest rates. This means that if you’re looking to invest in treasury securities, you should expect fewer overall returns. Treasury securities are perfect for those extremely risk-averse individuals who are looking for the safest way to invest.
Individual Retirement Accounts (IRAs)
Aptly named, these types of accounts are specifically designed for saving for retirement. IRAs feature tax advantages to help you grow your investment a lot faster. There are various types of IRAs that you can choose from. This includes traditional IRAs and Roth IRAs. The main difference between the two is that the latter allows for tax-free investment growth. This is extremely beneficial if you’re expecting to be included in a higher income tax bracket in the future. However, if you expect that you will roughly be in the same income tax bracket for a while, then it may be wiser to go with a traditional IRA. Roth IRAs limit your contributions to your income and tax filing status.
Furthermore, in IRAs, you can only contribute the money that you have earned through wages or salary. Contemplating between these two types of IRAs requires some level of discretion on the part of the investor.