Low Risk Ways to Start Investing Your Money

The following is presented for informational purposes only.

Saving money is the foundation of any great financial plan. Saving money, however, isn't the same thing as growing money. If you want your money to do more than just sit there, you'll have to take risks and not simply stuff everything into a savings account.

Those risks don't have to be dangerous though. While you'll probably hear stories of huge sums of money made and lost in the latest investment scheme, the best path for a beginning investor is to start small. You should never invest more than you can afford to lose. In the right environment, a small investment of $50-$100 a month can create healthy returns over time.

And you shouldn't forsake simple, accessible savings. Good investing is a balance of keeping the right amount of cash liquid, while the rest goes to work for you. You don’t need to sink your entire savings account into the stock market and hope for the best. As long as you make sound investment choices, your money will grow faster than it will in an interest-bearing savings account, allowing you to build your wealth faster.

There are a variety of low-risk investments that can pay off and help build your savings. Here are a few to consider if you’re new to the world of investment.

Money Market Fund

You want low risk? It doesn't get much more low risk than a money market fund.

A money market account is a mutual fund that protects your principal. The fund pays out a little bit of interest while keeping your principal safe. You can use an online broker like TD Ameritrade or E*Trade to set one up. You won’t earn a lot of interest, but you will earn some and never worry about losing your investment.

What to keep in mind: A money market fund is extremely liquid, meaning that while you won't earn much, you can easily pull your funds out and put them elsewhere whenever you want. It's a small step above a regular a savings account, which makes it a great starting point for investing. 

Corporate Bonds

When you purchase a bond, you're essentially lending money to a company or government entity. The bond will have a set time period, and you'll receive interest payments over regular intervals. When the bond matures and reaches the agreed upon end date, you get your investment back.

Government bonds are very low risk, but typically don't pay out very much. Corporate bonds, on the other hand, are higher risk, but usually carry much more favorable interest rates. As of December 2021, the average interest rate on 10-year high-quality bonds was 2.61%, according to the St. Louis Federal Reserve. Of course, those rates are locked in once you purchase the bond, so if rates go up during the duration you could miss out.

What to keep in mind: You're essentially investing in a company, and while corporate bonds don't function the same way as stocks, you'll want to have a high degree of faith in the company. Corporate bonds tend to only be offered by highly rated companies, but if the company goes under you may lose some or all of your investment. You may need to decide between an extremely stable company offering a lower return versus a riskier company offering a higher return.

Fixed Annuities

A fixed annuity is a great low risk, high(ish) reward option for retirement planning. They function something like a self-funded pension fund, where you make payment upfront, and then receive your payout later, typically in installments.

The "fixed" part of fixed annuities is the major selling point. The return on your investment during the contract period is fixed and won't change (in either direction), no matter what the market does. That's why fixed annuities are a popular supplement to retirement savings.

What to keep in mind: There different kinds of annuities, including variable and index annuities. Fixed annuities are typically the safest and simplest, but that reduced risk means a reduce potential payout. And as with all investment products, there are rules, fees, and penalties to keep in mind. Be sure that you understand the terms of your annuities before signing up.

Preferred Stocks

Buying stock means buying an ownership stake in a company. With the more popular "common" stocks, this comes with voting rights. Preferred stocks don't come with voting rights, but they do tend to pay out dividends on a regular schedule.

In many ways, preferred stock rest somewhere between common stock and corporate bonds. With preferred stock you get the consistent payouts that are associated with bonds, with the potential to see those payouts increase if the company does well. Preferred stocks, however, have less potential to gain or lose value, as compared to common stocks. They're safer, but still many of the same risks that owning any stock comes with.

What to keep in mind: Preferred stockholders are prioritized over common stockholders, which means that while dividends aren't guaranteed, the payout to preferred stockholders comes first. However, if the company goes bankruptcy, bondholders are actually prioritized over preferred stockholders (who are still prioritized over common stockholders). Again, this just ties back to the underlying theme of investing: risk and earning potential go hand-in-hand. 

Treasury Inflation Protected Securities (TIPS)

This is a low-risk investment from the US Treasury and it comes with two methods of growth. First, there is a fixed interest rate that doesn’t change over the term of the bond. And second, there is a built-in inflation protection guaranteed by the government. Whatever rate inflation grows by during the term of your TIPS, your investment value will grow. This way you aren't penalized if inflation grows higher than your interest rate during the maturity period, which could seriously erode the value of your investment.

TIPS are available in 5, 10, and 30 year maturities and can be purchased directly from the Treasury.

What to keep in mind: While TIPS can protect your investment against inflation, they are also tied to deflation. If there's deflation (in other words, if the prices of goods and services across the country went down instead of up) then the value of your investment principle would deflate at the same rate. Deflation of 5% would bring a $1,000 principle down to $950, which would impact your interest payments. Even if there is deflation, once the security matures, you would receive no less than the original principle. So basically you can't lose any of the value of what you put in, but deflation would adversely impact the return on your investment. 

Protect Your Investments

When you’re ready to start investing, there are a few things you should do to protect your investments:

• Never invest more than you can afford to lose unless it’s an investment that protects the principal.
• Pay down debt before investing, especially high-interest credit cards. This is a better use of your funds.
• Look for ways to spend less or earn more so that you can invest more comfortably.
• Make sure you have an emergency fund set up because you may not be able to touch your investment money for several years.
• Do your homework before making any investments so that you can feel confident about the decisions you make.

Investing is well worth the effort and can help you reach your financial goals faster. Just make sure you make sounds investment decisions and start with small, low-risk investments until you have more money to work with.

Need to clear away some lingering debt before you can start investing? A debt management plan can help you save money, shed debt quickly, and build a stronger credit history in the process.