What are the Best Savings Plans with Low Risk?

Low-risk investments can be a smart option for people who want to keep their money safe and protect it from potential losses, while still getting modest returns. The advantages of low-risk investing include protection of your initial investment, stability, and diversification for your portfolio. Investing in these vehicles is particularly useful if you'll need to withdraw the money in the short-term, for example, for a down payment for a home. Keep in mind that your potential profits may be limited compared to riskier investments like the stock market. 

Popular low-risk investment options

When it comes to growing your money, the best short-term savings accounts like CDs and high-yield savings are generally very safe. You'll know in advance how much interest your money will earn over a specific period of time. This can be anywhere from a couple months up to five years. 

We've gathered some of the most common short-term investment options to help you determine which might be the best product for you. 

1. US Treasury Bills

A US Treasury Bill, often referred to as a T-Bill, is a short-term loan issued by the United States government. It is a type of debt security that the government sells to investors to raise funds to finance its operations. When you invest in a treasury bill, you are essentially lending money to the government for a specific period of time. As of May 2023, the US government has always met its debt payments, making them a popular option for investors seeking low-risk returns. 

Currently, interest rates for treasury bills are between 3.5 to 4.75%. 

Pros:

• Safety: T-bills are considered one of the safest investments because they are backed by the US government, which means the risk of default is extremely low.
• Liquidity: T-bills are highly liquid, meaning you can easily buy or sell them in the secondary market before their maturity date, providing flexibility and access to your funds if needed.
• Stable returns: These investments offer predictable returns as they have a fixed maturity period and are sold at a discount to their face value. You receive the full face value at maturity, which means you know exactly how much you'll earn.

Cons:

• Low returns: Compared to other investments, T-bills tend to offer lower returns, so earning potential is limited. 
• Inflation risk: T-bills have a fixed interest rate. So, if inflation rises, the purchasing power of the returns may decrease over time. 
• Opportunity cost: T-bills prioritize safety over potential growth, so you sacrifice the opportunity to earn profits on high-yield investments like stocks and bonds. 

Term: Short-term (1 year or less)

Risk Level: Very Low

2. Certificates of Deposit (CDs)

A Certificate of Deposit is a type of savings account that earns higher interest rates than typical savings accounts. When you open a CD, you agree to deposit a specific amount of money for a fixed period of time, known as the CD's term. During this time, the money you deposit earns interest at a predetermined rate.

Certain banks are currently offering CDs ranging from 6-months to 5-years at rates between 4 - 5%. 

Pros:

• FDIC insurance: The Federal Deposit Insurance Corporation (FDIC), insures CDS up to $250,000 per depositor per bank. This gives you piece of mind that your investments will be protected, should your bank fail. 
• Fixed returns: CDs offer a fixed interest rate throughout the term, providing predictable returns. You'll know exactly how much interest you will earn by the end of the CD's term.
• Diversification: Investing in CDs can be a part of a diversified portfolio. By allocating some of your short-term investment options to CDs, you can balance risk and potentially enhance stability in your overall investment strategy.

Cons:

• Limited flexibility: Once you deposit money into a CD, you typically cannot access it until the CD matures without facing penalties. This can be a disadvantage if you need immediate access to your funds.
• Interest rate dependent on inflation: CDs may not keep up with inflation over time. If the interest rate on your CD is lower than the inflation rate, the purchasing power of your returns may decrease, meaning the real value of your investment could decline. 
• Limited returns: CD interest rates tend to be lower compared to other investment options, such as stocks or bonds. By investing in CDs, you may miss out on potentially higher returns available in riskier investments.

Term: Short-term to mid-term (typically anywhere from 3 months to 5 years). 

Risk Level: Very Low

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3. High-Yield Savings Accounts

A high-yield savings account offers higher interest rates compared to a traditional savings account, allowing you to earn more on your savings over time. It provides an opportunity to grow your money at a faster pace while still maintaining the accessibility and security of a savings account. 

Some banks and online providers are currently offering interest rates of 3.75% to 4.85% on high-yield savings accounts, making them a relatively profitable investment for the short-term. Apple recently launched a high-yield savings account in partnership with Goldman Sachs, offering an APR of 4.15% to Apple Card users. 

Pros:

• Competitive interest rates: The best high-yield savings accounts offer higher interest rates compared to traditional savings accounts. This means your money can grow faster over time, helping you maximize your savings.
• Accessibility: High-yield savings accounts provide easy access to your funds. You can usually make withdrawals or transfers online, through ATMs, or via electronic transfers, giving you flexibility and convenience when managing your money.
• No penalty for early withdrawal: Unlike CDs, high-yield savings accounts generally do not require you to keep your money in the account for a fixed period of time before you can withdraw it. This means you can access your money whenever you need it without incurring extra fees.

Cons:

• Account requirements: Some high-yield savings accounts may have certain requirements, such as minimum balance requirements or limits on the number of monthly transactions. It's important to review and understand these requirements to ensure they align with your needs and financial situation.
• Fluctuating interest rates: The interest rates on high-yield savings accounts are subject to change based on market conditions. This means the rate you receive today may not be the same in the future, potentially affecting the overall returns on your savings.
• Inflation risk: Similarly to other savings accounts, high-yield savings accounts may not keep pace with inflation. 

Term: Short-term to long-term

Risk Level: Very Low

4. Money Market Accounts

A money market account is very similar to a high-yield savings account. The main difference between a money market account and other short-term investment options is that money market accounts provide you with a debit card and checks, so that you can have regular access to your funds. 

Money market accounts are currently yielding around 4% at certain institutions and online providers.

Pros:

• Accessibility: You can simply swipe your debit card or write a check to access the funds in the account.
• Protection: Like CDs, money market accounts are also FDIC-insured. 

Cons:

• Minimum deposits: Some banks may require a minimum deposit from anywhere to a few hundred dollars to a few thousand. In addition, money market accounts also may require that you maintain a minimum balance in the account or be subject to a lower interest rate or charged a penalty fee.
• Withdrawal restrictions: Although not as restricted as a high-yield savings account, you'll typically be limited to the number of withdrawals you can make from the account per year. 

Term: Medium-term to long-term

Risk Level: Very Low

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5. Cash Management Accounts

A cash management account (CMA) combines features of a checking account, savings account, and investment account into a single account. Non-bank financial institutions, such as brokerage firms and robo-advisory firms, typically offer these. Some CMAs can provider high interest rates and low fees since their services are typically only offered online. 

Pros:

• Favorable interest rates: Though you should compare and shop around, CMAs tend to offer higher interest rates than standard checking and savings accounts at banks. 
• Low balance requirements: Unlike high-yield savings and money market accounts, CMAs tend to have low minimum balance requirements. 
• Familiarity: CMAs function very similarly to regular bank accounts, so the learning curve to getting started is quire low. 

Cons:

• Conservative interest rates: These accounts have lower interest rates compared to other low-risk investments like CDs, money market accounts and high-yield savings accounts. 
• Lesser customer service: Since these accounts are usually offered by online-only platforms, their customer service is usually only available online. If you prefer to have questions answered in-person, this type of account might not be right for you. 

Term: Medium-term to long-term

Risk Level: Low

Tips & strategies for making the most out of your low-risk investment

To optimize your short-term high-yield investments, you can align them with your short and long-term financial goals. Begin by defining those goals, asking yourself what you want to achieve with your money. Are you saving to buy your first home? Is your money going towards retirement or an emergency fund? Perhaps you have a combination of these goals. Regardless of the intention, identifying it can be helpful as each ambition can warrant different investment holdings and long-term strategies. 

Your goals may influence the types of investments you hold, but one strategy that can benefit most investors is diversification. The idea behind it is not to put all your eggs in one basket. Within investing, this means spreading your money across different types of holdings. For example, a diversified portfolio might include a mix of high-yield savings accounts, CDs, money market accounts, and treasury bills for low-risk options. When done correctly, diversification can help protect against potential losses while maximizing your return. 

Another valuable strategy is to review your investments regularly. Interest rates and the financial markets are not static but constantly evolving. It can be beneficial to revisit your holding to ensure they still fit within your strategy and are helping you achieve your goals. (Read more: The Complete Guide to Interest Rates and How They Are Determined).

As you begin to develop your short-term savings plan, remember that everyone's financial situation and tolerance for risk are different. The best way to invest money for you might differ from what is ideal for someone else. 

How to analyze risk & maximize profits from different investment opportunities

Even the best short-term savings accounts are not without risk. Most investors find it beneficial to analyze the following investment risk and return factors. 

• Timeframe: The longer you can leave your money invested, the more risk you might be able to handle. With more time to recover from potential losses, you may want to pursue higher returns. Higher return potential typically means greater risk, though.
• Liquidity: Liquidity is how easily you can convert an investment into cash without loss. Some allow instant access, while others might require a commitment. If you don't expect you'll need access to your funds in the short-term, you can invest in less liquid assets like real estate, art and antiques and private equity.
• Interest rates: Over time, interest rates can change, directly impacting return. When interest rates rise, it can drive down the value of specific assets. Being informed about current rates allows you to adjust your holdings and purchase assets that can increase your return.  
• Inflation: Inflation increases prices over time, with more money needed to buy the same items. By considering today’s inflation rate against your investment's return, you can determine if your savings will keep up appropriately. If your returns are not outpacing inflation, you lose purchasing power over time. 

The goal is to boost returns and keep your initial investment safe. It is about balancing both risk and return potential, finding what works for you.

Conclusion

There is no single best way to invest money, only the most suitable for you based on your financial goals, timeline, and risk tolerance. From treasury bills and CDs to high-yield investment accounts and CMAs, numerous short-term investment options can cater to different needs. To ensure your low-risk investment choices match your financial goals, consider diversification, or spreading your investments across various assets, to help mitigate potential losses and drive growth. You can also review your investments regularly to ensure they align with your goals.

Analyzing risk-return factors can help maximize your investment returns. Consider the timeframe of your investment and the trade-off between liquidity and possible growth. Understanding the impact of interest rates and inflation on your potential return can also be helpful. Balancing these aspects allows you to grow your savings while reducing risk. 

Remember, low-risk investments might minimize losses but do not eliminate risk entirely. Finding the savings plan that aligns with your objectives allows you to manage risk effectively and move closer to achieving your financial goals.

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