In a small town in mid-central Minnesota in the late 1970s, a short, old man wearing a beaten up coat, and dirty blue jeans often walked through the town, kindly smiling at folks, and patronizing the local stores. Those who didn’t know him by name, recognized him by sight because of his unkempt appearance. He lived in a decrepit shack without an inside toilet. To an outsider, he looked destitute, but the truth came out years later when he died. In his house stuffed in every crevice, and every container was over a million dollars in cash, and even some uncashed checks. Today when banks are failing, insurance companies struggle and make you wonder whether an annuity is safe, and big investment gurus go to jail for putting together Ponzi schemes, one might wonder if you should start stuffing the mattresses. Don’t do it. There are safe ways to take care of your cash, and you never have to worry about a house fire taking it all away.
Safety Deposit Box
1. One of the safest ways to preserve your cash is to put it into $100 bills, then into an envelope, and put it into a safety deposit box. Even if there were a bank holiday where no business was allowed to transact, most banks will open for the holders of safety deposit boxes. Indeed, some safety conscious financial gurus have suggested that you keep several thousand dollars just like that in case of a bank holiday or shut down.It’s better than a home safe where thieves can find it, and as long as you keep your key available to the administrator of your will or your lawyer’s office, your heirs should be able to get into it.
There is a distinct disadvantage to that system, however, and that is that your money is not working for you. There is no interest coming in and therefore no yield. Think of it this way. Each dollar bill is like a worker slaving away on your behalf to take care of you. If you stick your workers in a box and never use them, then they can’t bring in more money. Over time, they don’t work as hard (buy as much) for you because the work they have to do has gotten bigger and more difficult (think inflation.) So if you have to hide some away, the safety deposit box is a solid place for it, but not the best one.
Certificate of Deposit
2. Want your little worker dollars actually bringing in more worker dollars? Well, there are other options where you can actually make money off of the dollars. The first is the bank certificate of deposit, or CD. Banks generally pay you to use your money, albeit the return is often small. If you want income, you can buy these Cd’s to pay out on a staggered time line, thus giving you a residual income. Still, as long as you research your bank well, and see it is rated to be safe, Bauerfinancial.com rate banks, and the banks can not either elect or refuse to be rated. If the bank ratings are excellent, then the Cd’s are going to probably be fairly safe.
The downside about Cd’s is two fold. First, the money will be tied up and totally unavailable until the maturity date, only to be taken out with a stiff penalty. Thus it is not good for emergency money. Second, the rates on the CD often will not keep up with inflation. Say you put a thousand dollars into a CD with the hopes of buying an $1100 home entertainment system on the date the CD matures. The day when get your $1100, you find out that the stereo now costs $1175. Thus the purchase power of that $1100 has now diminished due to inflation.
Money Market Accounts
3. Another safe investment bet is a money market account based only on Government securities and Treasuries. This is very similar to a bank account in many respects in that account holders can use checks to make withdrawals. These accounts are used by banks and brokerage accounts both, and often dividends are "swept" into it. They are insured by the government with deposit insurance, and are considered safe and available.
The downside of money market accounts is that they usually have a low return, much like the CD. And with many of the brokerage firms having difficulty, there have been times when the accounts have been close to defaulting. Thankfully the government has covered these situations. However, it is not a worry anyone wants.
Money market accounts are often mistaken for money market funds. These are not the same thing, nor do money market funds have the same safety level as a money market account. Money market funds can hold debt obligations ranging from Cd’s to Treasuries, to commercial paper (debt by companies or municipalities.) Sometimes their return is higher than a money market account because its investments are more diversified. However, companies that have these funds guarantee that they will never go below the level of your initial investment. The money is very liquid and until recently, considered quite safe.
The downside of the money market account is that they are not insured. Thus they are not on the list of safest investments, especially when so many brokerage and investment firms are struggling. The good news is that most companies want their money funds to be always trustworthy, so these accounts are often shored up in times when they are close to failing.
U.S. Government Investments
4. The last of the safest investments are from the United States Government. There are a myriad of investment vehicles, such as TIPS, treasuries, and bonds that are released often to give the American people the chance to invest in the future of our government. The best place to buy these are from the government itself, and can be found on line at /www.treas.gov/get-it-done. Some of these have tax consequences, so discussing it with an accountant might be a good tax strategy. For example, when EE series bonds are turned in, the return is tax free as long as the proceeds are used to financing some aspect of a person’s education. It’s a great way to save for college. Another positive aspect of bonds and treasuries is that some are designed to keep up with inflation. Treasury Inflation Protected Securities (TIPS) for example, are,designed to keep ahead of the Consumer Price index. And the nice thing is that all of these securities are backed by the full faith of the United States, a country which has always honored the holder of debt securities.
The downside is that bonds sometimes fluctuate in value. Some tend to soar in value when they are hot, and drop when they are not. These take minding, and that is not something you have to worry about with the investments featured above. These investments can also tie up your money, making it difficult to use them quickly. The main thing is, they are safe. And right now, safe is very good.
The miserly old man that died a with his millions tucked around his house had lived through the Depression and had lost his money in the bank. His need to hoard money became more important than we all realize. Perhaps if he had been educated on ways to keep his money safe, he might have had a different life. Let us hope that you can sleep safer at night knowing that there are safe havens for your hard earned cash.