Investing is a way to increase your net worth by using calculated risk to generate more income. For individuals who prefer to minimize the risk, there are several low- to no-risk investment options. Many of these options are offered by financial institutions and may be insured up to a specified limit.
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If you are seeking higher returns than those provided by standard deposit accounts, but prefer a softer approach, consider the following options:
Certificate of Deposit
A Certificate of Deposit, also called a CD, is an account that offers higher interest rates than traditional savings accounts and provides a variety of term options, often ranging from three months to five years. By investing in a CD, you commit your funds to the account for a specified period, during which withdrawals are not allowed.
To enhance the liquidity of your funds, consider a laddering strategy. This involves purchasing multiple CDs with staggered terms, which allows your funds to become accessible at regular intervals as each CD matures.
CDs opened through banks or credit unions are typically insured and are not tied to the stock market, which offers a stable investment while maintaining reduced risk. However, early withdrawals or breaking the CD before its maturity date may incur fees or penalties.
Money Market Account
While some money market accounts are tied to the stock market and carry higher risk, those offered by financial institutions generally do not have this exposure. Money market accounts provide accessibility, allowing access to your funds while offering higher interest rates than traditional savings accounts. Unlike Certificates of Deposit, money market accounts do not require funds to be locked in for a fixed term. However, they typically offer lower returns than CDs. It is important to review the account terms carefully, as there may be restrictions on withdrawals.
Fixed Annuity
Fixed annuities, backed by insurance companies, represent a low-risk investment option for many individuals. Typically, the terms associated with fixed annuities are longer than those of Certificates of Deposit, but they often offer significantly higher rates. With a fixed annuity, the insurance company guarantees a minimum guaranteed interest rate, ensuring that the rate will not fall below this level, even if market rates fluctuate. Fixed annuities provide a reliable income stream upon completion of the term. However, they usually offer limited or no withdrawal options before the term ends.
Selecting the right investment strategy depends on your financial goals, risk tolerance, and the period in which you wish to see returns. Certificates of Deposit, money market accounts, and fixed annuities each offer distinct advantages and can be valuable components of a well-rounded investment portfolio. CDs provide stable, higher returns with fixed terms and the option for laddering liquidity. Money market accounts offer flexibility and access to funds while maintaining minimal risk. Fixed annuities, backed by insurance companies, offer long-term stability with guaranteed minimum interest rates and a reliable income stream. Ensuring that the product aligns with your financial objectives is crucial in selecting the appropriate product for your needs and will help you make informed decisions to achieve your investment goals effectively.
Author: Rachel Caballero is community development and PR manager at TruWest Credit Union.
