Safety is the name of the game when it comes to your savings. The last thing you want when trying to build a savings cushion is to lose it all and return to square one.
Fortunately, you can stash savings in a number of safe financial instruments that also reward your efforts with a little free money in the form of interest.
While they aren't going to set the world on fire with sky-high returns, the following investments each provide a safe place to park your savings:
Places to park your cash
Government bond funds
- What they are: Government bond funds are mutual funds that invest in debt securities that the U.S. government and its agencies issue. The funds invest in debt instruments such as T-bills, T-notes, T-bonds, Treasury inflation-protected securities and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac.
- Risk: Funds that invest in government debt instruments are considered to be among the safest investments because the securities are backed by the full faith and credit of the U.S. government.
- Liquidity: Bond fund shares are highly liquid.
- Pros and cons: Government bond funds are considered low-risk investments that can provide diversification to investment portfolios. They tend to pay higher dividends than money market and savings accounts and typically pay out dividends more frequently than individual bonds, sometimes monthly. Moreover, certain government bond funds are exempt from state and local taxes.
However, like other mutual funds, the fund itself is subject to risks -- namely interest rate fluctuations and inflation. If interest rates rise, bond prices decline, and if interest rates decline, bond prices rise. Interest-rate risk is greater for long-term bonds. Furthermore, if the inflation rate rises, purchasing power can be diminished.
- Where to find them: Shares held in bond funds can be bought and sold through a mutual fund company or brokerage firm.