Charlie MarlowThe world is full of uncertainty, and we cannot eliminate risk. Through awareness and understanding, we can make wise financial choices. Saving and investing for our future is essential, but there are no 100% risk-free options. Every option, even simple savings accounts, carry risk. Understand what the risks are, know which ones to accept, and how to mitigate them. Let’s explore some of the benefits and risks associated with common savings and investment tools.
- Benefits:
- FDIC safety
- Instant access
- Risks:
- Low returns and erosion of value through inflation
- Ideal for emergency funds and short-term savings goals such as future purchases
- Insured up to $250,000 per owner through Federal Deposit Insurance Corporation (FDIC)
- No or low minimum opening deposits or minimum balances – watch for monthly withdrawal limits
- Interest rates fluctuate and may not keep up with inflation
- Benefits:
- Guaranteed return with higher interest rates than savings accounts
- Risks:
- Early withdrawal penalties and interest rate risk
- Ideal if you know you won’t need money for the period of the CD
- Interest rates are typically higher and locked in for the term, even if other rates increase or decrease
- Penalties if you withdraw early
- When CDs mature, you may only find lower rates to reinvest
- Benefits:
- Higher interest rates than regular savings
- May have checking features
- Risks:
- Balance requirements, variable interest rates, and limited transactions
- Excellent choice for emergency funds – higher interest rates and easier access
- Interest rates are variable and may depend on account balance
- Beware of fees that may reduce your yield
- Benefits:
- Inflation-adjusted interest rates
- Tax advantages
- Risks:
- Limited liquidity and purchase limits
- Adjusts interest rate for inflation twice a year
- Safe investment – carries the full faith and credit of the federal government
- Interest may be deferred until redeemed or for 30 years – interest is exempt from state and local income taxes
- Minimum investment $25, but limited to $10,000 per taxpayer
- Must be held 12 months before redemption – 3-month interest penalty if cashed within 5 years
- Benefits:
- High growth potential
- Liquidity
- Risks:
- Market volatility and emotional investing
- Stock is a partial ownership of a corporation, making you a part owner of the business
- Stock values are volatile in the short term, but tend to show growth over long periods
- Can be easily bought and sold online or through a broker
- Dividends can be used for income or reinvested for compound growth
- There is no guarantee of success – internal and external factors affect stock values
- Benefits:
- Steady income
- Lower volatility than stocks
- Risks:
- Interest rate and credit risks
- Bonds are debt instruments – you are lending money to the company or government
- Income comes from regular interest payments, and the principal is repaid at the bond’s maturity
- Typically, more stable than stocks – can provide a portfolio buffer against of stock declines
- Can be bought and sold on the secondary market – prices are affected by interest rates
- Credit risk – the issuer may default on dividend or principal payments
- Benefits:
- Instant diversification
- Professional management
- Risks:
- Market exposure and management fees
- Mutual funds provide diversification – funds buy a broad variety of stocks, bonds, and other securities
- Values fluctuate with market conditions – annual swings of 20% are common – but long-term growth averages 10%
- Fund managers making trade decisions, for which you pay a fee
- Funds offer long-term wealth building–time in the market beats timing the market
While risks exist, recognizing them and how to mitigate them can help you be a more successful saver and investor. Matching each tool’s strengths to your timeline and goals will help you build a mission-ready financial plan.
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