Four investments that keep your money secure

You know all the rules about getting ahead financially. You understand that you’re supposed to keep your expenses under control, stay out of debt, and save as much of your salary as you can. And you know that if you stick to these rules for long enough, you’ll eventually end up with a nice big balance in the bank. At that point, you’re left with another question: What should you do with it?

If you just let it keep piling up in the bank, your money stays safe and is available to you if you need it – but at today’s interest rates, it won’t earn much. As the balance keeps climbing higher and the interest payments stay pitifully small, you’re likely to wonder whether you’d be better off moving your funds to some other sort of investment – but if so, what?

According to www.moneycrashers.com, the answer depends partly on what you’re saving your money for. When you’re saving for retirement, stocks (or a mix of stocks and other investments) are your best bet because they offer the best returns over the long run. However, for short-term savings, such as your emergency fund or personal savings, you need an account that keeps your money safe until you need it – while also bringing in a little interest to add to it.

What to look for

If you’re saving up for a long-term financial goal, such as retirement, then your top priority is to grow your money over the long term and build an adequate nest egg. You don’t need to worry much about the day-to-day ups and downs in your balance, just as long as the general trend through the years is upward.

However, other financial needs are more immediate. For instance, you need to build up an emergency fund to pay for unexpected expenses, such as major medical bills or damage to your home from a flood. You also need some personal savings to cover large but less urgent expenses, such as a vacation, a new car, or a new piece of furniture. Or you might be saving for an expense you expect to have in a few years, such as a wedding or a down payment on your first house.

There are several types of investments that meet these basic criteria. According to www.moneycrashers.com, here are some of them:

1. Bank accounts

The easiest thing to do with your savings is simply keep it in the bank. Bank accounts are easy to access and very safe because they’re insured by the Nigeria Deposit Insurance Corporation. So, even if your bank goes out of business, you’re guaranteed to get your money back.

The biggest drawback of a bank account is that interest rates are very low. Granted, the main point of a bank account is to protect your money, and not to earn interest. But right now, interest rates are so low that they can’t even keep pace with inflation.

It is said that money is meant to be kept.  A bank savings account is a type of account designed to hold money that you do not need immediate access to. When contrasted with current accounts, bank savings accounts tend to pay a slightly higher interest rate.  The main benefit of a savings account is the safety of your money. The other nice benefit of these accounts is flexibility and easy access to your money. You can put in small or large amounts often and take your money back out when you need to. Bank savings accounts are ideal for emergency funds – for unexpected life events such as a job loss or prolonged illness.

What are the drawbacks? If you have heard the saying, “No risk; no reward,” then you understand that as you have no risk of losing money that means you will also receive minimal interest (or rent) for your money. The interest rates earned on bank savings are likely to be lower than inflation rates.

2. CBN Treasury bills/securities

The Federal Government issued securities are safe because they are backed by the faith and credit of the government. Investments issued by the Federal Government are considered very safe. These include things like the Treasury bills, bonds and notes. You can purchase these safe investments by opening an account directly with the bank.

What are the benefits?

Let’s be realistic for a moment, the Federal Government has what’s called “full faith and credit” for its ability to repay investors of issued securities, and has several years’ history of doing so. It is able to do this by selling more securities, collecting taxes, or printing more money. The Nigerian economy is large enough that other countries will also invest in Nigeria securities.

Because people want to own these types of investments for their high degree of security, there is always a market to sell your Federal Government investments. This means that if you are not able to hold onto them until the specified maturity date, you will still get a fair market price when you sell them.

The wide variety of investments available ranges from bills, notes, bonds to savings bonds. Some of the investments pay current interest, others you buy at a discount and get your return upon maturity. For people not needing the interest payments now, they may elect zero-coupon bonds.

What are the drawbacks?

Probably the only drawback to government issued securities is the low return on your investment. Safety comes at price. Unlike others like the bank account where these companies are competing to get your money, the Federal Government does not run “teaser rates” or provide free toasters for opening a new account. Rising inflation or rising interest rates have varying affects on different types of government bonds. Depending on the type of government bond you own; if you sell it before maturity, you could get back less than the original amount you invested.

3. Money market accounts

With money markets, the brokerage company pays you interest each month for your money held with them. The company attempts to hold the share value of the fund constant, but will pay a variable interest rate.  Money market funds are a popular cash management tool and although they are not as safe as a bank savings account or Treasury instruments, they are still considered a secure place to park cash.

What are the benefits?

The primary benefit of a money market fund is the active management of very short-term investments. A mutual fund company has professional researchers, analysts, and traders that manage a large group of investors’ money with the goal of doing better than what the Treasury yield will do in the same period of time. Bear in mind, we are talking about very small increments of return.

Because of the short-term nature of the fund objective, investors generally have the ability to put money in or take money out any time. However, some money market funds have higher minimums or limited liquidity – this allows the fund a more consistent use of investor money and thus funds with higher minimums or limited liquidity often pay a slightly higher yield.

What are the drawbacks?

A common theme with safe investments is the inability to compete with long-term inflation rates. Although money market funds aim to keep a stable value, it is not guaranteed.

When interest rates are low, it is more difficult for a money market fund to produce a better income yield for investors. This is mainly due to the costs of operating the fund.

In terms of safety, the main drawback is no guarantee by the “full faith and credit” of the Federal Government.

4. Fixed annuities

Fixed annuities are issued by insurance companies. You give them your money and they promise to pay a certain amount back to you for a certain amount of time, according to www.thebalance.com.

A fixed annuity is a contract with an insurance company. You give them your money to manage, and in exchange, they pay you a guaranteed return. Usually the interest on a fixed annuity is tax-deferred. Fixed annuities are usually not liquid, which means you will not have easy access to the funds like you do with a bank savings account or money market account.

What are the benefits?

Fixed annuity investors lock in a rate of return. You know what you will get and when you will get it.

What are the drawbacks?

By now, you should be aware of the ongoing concern with safe investments – that returns will not keep up with inflation. Having a guaranteed and safe return on part of your retirement investments is a good idea, but keep in mind there can be hefty penalties and taxes to get your money out of an annuity early.