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
Money market funds
- What they are: Money market funds are mutual funds that typically invest in high-quality, short-term investments that mature in 13 months or less. Fund investments can include U.S. Treasury securities, CDs, federal agency notes, commercial paper and municipal securities. Money market mutual funds base their annual rate of return on the yield the fund has earned over a seven-day period. Fund managers try to maintain a share price of $1. The share price is known as net asset value, or NAV.
- Risk: Because money market funds technically are securities, they are not insured by the Federal Deposit Insurance Corp. or the National Credit Union Administration (for credit unions). So there's no guarantee that the share price will remain stable at $1 per share. If the share price dips below $1, you could lose some of your principal. When a money market fund is unable to maintain a $1 NAV, it's known as "breaking the buck." This rarely happens, although it has occurred occasionally in recent years as a consequence of the credit crisis.
- Liquidity: Money market funds, like money market accounts, often provide check-writing and money transfer privileges for shareholders.
- Pros and cons: Money market funds, like other mutual funds, can be bought or sold at any time. They typically pay investors a monthly dividend.
Yields usually are competitive with savings accounts. The U.S. Securities and Exchange Commission prohibits the average maturity of fund investments from exceeding 90 days. Restricting investments to such short terms helps reduce risk to investors by protecting them from major rate fluctuations that may occur over longer periods. Interest rates can vary, so there's no guarantee of how much you'll earn from month to month.
Money market funds usually provide lower returns than riskier investments such as stocks, which means inflation and fees can eat away at returns over the long run. Also, earned interest may be subject to income tax depending on whether the fund invests in taxable or tax-exempt securities.
- Where to find them: You can buy money market funds at brokerage houses, mutual fund companies and some banks.