There's no shame in seeking a safe place to park a portion of your cash.
Collectively, we've been through a lot over the past few years. In addition to the COVID-19 pandemic, we've dealt with a short recession, high gas prices due to Russia's invasion of Ukraine, and now, rising interest rates. It's no wonder if you're looking for smart places to protect some of your assets in 2023.
We're not going to suggest any specific investments here. Rather, we'll cover some of the easiest ways to keep a portion of your cash secure.
1. Bonds
Bonds are like IOUs. When you buy a bond, you're lending money to whomever issued it. That may be a company, government, or municipality. While the entity you loaned the money to receives the funds it needs to operate, you receive a promise that the issuer will pay you a specific interest rate over the life of the bond. When the bond matures, you receive your principal back -- plus interest.
2. Certificates of deposit (CDs)
A certificate of deposit (CD) is a type of savings account that keeps your money safe for a specific amount of time. For example, you may put funds into a 6-month, 1-year, or 5-year CD. In exchange for allowing the bank or credit union to hold your money for that time, you are paid interest when the CD matures. Typically, the longer the term, the higher the rate of interest you are paid.
3. Money market funds
To understand how a money market fund works, it helps to understand how a mutual fund works. When you put money in a mutual fund, your money is pooled with many other investors. All that money is invested on your behalf by professional money managers. Those professionals diversify your holdings so that all your eggs are not in one basket, thereby lowering your risks.
A money market fund is simply one type of mutual fund. The cash in the fund is invested in high-quality, low-risk investments. One of the main differences between a money market fund and the money market deposit account that we cover next is that a money market fund is not federally insured, while a money market account is.
4. Money market accounts (MMAs)
Money market accounts (MMAs) are offered by banks and credit unions. Like other accounts in those financial institutions, MMAs are federally insured. Up to six times a month, you can use the money in your MMA to make payments or withdraw cash. The amount of interest paid on an MMA is typically higher than the interest paid on savings accounts.
5. High-yield savings account
If you currently have a savings account, you know that your money is secure. The same is true of a high-yield savings account. The major difference is that you'll earn a higher interest rate with a high-yield account than you're earning on a typical savings account. The interest rate you're paid is variable, meaning it will go up or down based on the Federal Reserve's benchmark interest rate.
6. Paying off existing debt
If you're carrying high-interest debt, paying it off is an investment in yourself. Let's say you have a credit card with a $15,000 balance and interest rate of 18%. Paying that balance off is like paying yourself 18% instead of the credit card company.
Planning for your financial future involves a certain level of risk. For example, there's risk involved in investing in the S&P 500, but failure to take some risk means also failing to reap the long-term financial rewards.
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The ideal portfolio is a balance of different risk levels. If your goal is to watch your money grow, you'll likely need to invest in a mix of riskier assets. Balance occurs when you spread those risks out, so winning investments can help carry struggling investments through the natural ups and downs of the market. Adding safe investments to the mix not only protects your money, it may also allow you to sleep easier at night.
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