What's the safest possible thing that I can do with my money?
March 20, 2008 12:18 PM   Subscribe

What's the safest possible thing that I can do with my money?

Anyone who's seen me around the finance threads knows that I take bearishness to an extreme. Having witnessed the 2000 tech crash, I have no faith in the stock market or the US economy. I keep all of my money (USD) in a savings account. However, with the recent financial turmoil, I have a few questions :

1) Is it conceivable for the FDIC to fail?
2) If so, is there a place where I can put my money that will be safer than a savings account?
3) What's the safest, most risk-free way for me to save money and not get killed by inflation and the tanking US dollar?
4) If there is a safe way for me to save money and not be punished by inflation and the depreciating dollar, is there a way that I can do this without having to stress out and micromanage my finances? I don't want to be checking the finance page and making adjustments every day.

One thing that I must ask of you all - please do not turn this into a political debate. I know that issues of economics are often politically charged, but I ask you to please not address that aspect of the situation. Also, please take it easy on me. Even though I follow finance news, I've never done any investing or money management other than socking money away in my savings account. I'm a n00b, I admit it, so please don't talk down to me.

Any links to relevant articles or informational resources - especially those readable to the layman - will be appreciated.

Thank you.
posted by Afroblanco to Work & Money (28 answers total) 45 users marked this as a favorite
1) It is conceivable for the FDIC to fail; however, such a failure would probably require that the US Federal Government be in such horrible shape that losing your savings account would probably not be your most serious concern.

2) US Savings Bonds are arguably safer even with the FDIC, though I'd still prefer a sub-$100k savings account.

3) A high-interest savings account. No guarantee of actually avoiding any of the above, but definitely the safest way of keeping things in dollars and not falling too far behind inflation, or even staying ahead of it a bit.

4) You could always buy a bunch of gold, I suppose. Though that's far from perfect.
posted by Tomorrowful at 12:24 PM on March 20, 2008 [1 favorite]

Try laddering* CDs in different banks. FDIC insures individual deposits up to $100,000 per account. This will solve your safety concerns, but not come close to meeting inflation and the devalued dollar. Also you will have to pay capital gains taxes on the interest.

*Laddering = buying CDs of differing maturity dates.
posted by Gungho at 12:27 PM on March 20, 2008

Response by poster: (oh, and I should have mentioned, I do have less than $100K in my savings account)
posted by Afroblanco at 12:28 PM on March 20, 2008

No. You must take some principal risk to stay ahead of inflation. Basically any fixed income securities, or deposit accounts, that yield around what you anticipate inflation to be, will provide a real rate of return (accounts for inflation) of 0%, which is all you can expect if you want zero risk.
Your ability to not stress out is not a function of the investment, it's a function of your personality. You can put your money under your mattress and still stress out over the strength of the deadbolt on your door. Or you can throw it all in a long-term investment and forget about it, and not stress at all. That one's on you.
posted by stupidsexyFlanders at 12:28 PM on March 20, 2008

Indeed, if we hit the point where the FDIC fails, you're going to wish you had put your money in buckshot and canned foods. There are plenty of other things to worry about without also fearing the failure of the federal government. Stay under the $100,000 cap and you'll be fine on that front.
posted by Partial Law at 12:30 PM on March 20, 2008

I would say that diversification is one of the smartest things you can do with your money while still taking advantage of wealth-building tools like compounding interest. By investing in a wide array of stocks, bonds, etc... you pad yourself from failure in any one area of your portfolio.

Investing is a solid way of making your money work for you, so I wouldn't dismiss it just because we are in a slump right now.
posted by ISeemToBeAVerb at 12:37 PM on March 20, 2008 [1 favorite]

Could be good to check out TIPS -- Inflation-protected government savings bonds. (I'm going to get this wrong, but) The principal is adjusted based on inflation, so the rate you're getting is always the rate + inflation rate. It's as safe as you're going to get before the government itself collapses, at which point little digits in a bank account probably aren't a big deal.
posted by one_bean at 12:42 PM on March 20, 2008

As others have said, if you're trying to plan for the FDIC failing, you might as well build a bunker and start hoarding bicycles. Things would have REALLY bad for that kind of a situation to come up.

Normally to beat inflation you have to make a bet one way or another. You have to bet that the stock market is going to go up or that it's going to go down. You have to bet that dollar is going to appreciate versus the euro or depreciate versus the euro. You have to bet that gold prices are going to go up or that they're going to go down. Whenever you make that kind of bet, the risk is of course that you might be wrong and lose part of your investment. The protection you get from the government on savings accounts is pretty much the closest you're going to get to a free lunch.
posted by burnmp3s at 12:45 PM on March 20, 2008 [1 favorite]

Best answer: Honestly, globally diversified index funds are your best the best bet for long-term growth if you don't want to be hit by currency fluctuations, inflation and all of that. this includes commodity and precious metals indexes. You need to decide what your time frame for withdrawl is. If you need the money in 6 months you'll need to do very different things than if you want to have it in 25 years.
posted by blue_beetle at 12:53 PM on March 20, 2008 [1 favorite]

Best answer: There are no worries about the FDIC failing unless the U.S. government itself ceases to exist. The government can print as much money as necessary to support the FDIC. An FDIC savings account or CD would be perfectly safe.

If you are worried about inflation, then Treasure Inflation Protected Securities (TIPS) or I-bonds will give you that protection. You can buy either from the government on line at TreasuryDirect. Or you can get TIPS through a mutual fund like the Vanguard TIPS fund. These bonds are 100% protected by the U.S. government and guaranteed to return at least the inflation rate. This is a little more inconvenient than a savings account but perfectly safe.
posted by JackFlash at 12:56 PM on March 20, 2008

Best answer: If you are worried about the future value of the US dollar, you should move some of your savings into other currencies (I'm assuming that any kind of stock-based investment is going to be too risky for you). I was going to link to a couple past questions about saving cash in Euros, but then I realised one of the questions was yours (the other one is here). You can buy ETFs for a number of different currencies. While the amounts that you invest in the ETFs are obviously not FDIC insured, so you expose yourself to some risk, you also greatly decrease the risk associated with changes in the value of the dollar. You could also use a foreign currency savings account in the USA (which would be FDIC insured), but the rate of return would likely be lower than inflation (see the other question linked above for a little more about Everbank). Carefully selected foreign government bonds would arguably be safer than the ETFs, but wouldn't be practical unless you had a lot of money. Opening savings accounts in other countries would be far too difficult. So the short answer is to either accept the suboptimal performance relative to inflation of, for example, Everbank or to accept the risk of an ETF.
posted by ssg at 12:58 PM on March 20, 2008 [2 favorites]

Really, the answers depend on what your goals are.

Are you saving for retirement in, for you, what, 40 or 50 years? Then "I want no risk" is essentially synonymous with "I want to be completely fucking broke when I am old and watch in bitter envy as my friends who just dumped money into index funds without thinking go on another cruise while I open another tin of cat food in my fleabag one-room apartment."

3) What's the safest, most risk-free way for me to save money and not get killed by inflation and the tanking US dollar?

Over a long time horizon? Probably to dump your money into some sort of very broadly diversified mutual fund and resolve never to look at what it's doing from one week to the next. The probability that after 40 years you would have been better off putting your money into risk-free accounts is infinitesimal.
posted by ROU_Xenophobe at 12:59 PM on March 20, 2008 [1 favorite]

Best answer: FDIC coverage is $100K per depositor, per bank. Not per account or per branch. FDIC info here.

CD ladders are a good idea, but you have to choose lengths and maturity dates you're comfortable with - otherwise, you'll stress about your lack of liquidity in case of emergency.

There are many different types of risk, though. If "safe" for you means "no risk of losing my principal," then FDIC-insured accounts are fine for that, and they're great for someone with a very short time window - close to retirement, or saving for a specific upcoming expense such as tuition or a down payment. However, when you factor in inflation, your money could lose spending power faster than it earns interest.

If you want to protect yourself against inflation risk, you need to put some of your money into something that's more risky from the loss-of-principal perspective. Like a stock market index fund. These funds don't try to play or time the market, they mirror the market as a whole. So you are participating in the overall state of the economy, good or bad. There are also bond funds and mixed funds.

To protect against inflation and the sinking dollar, you could look for a mutual fund that invests in US stock index funds, international index funds, and bond funds. There is a set percentage for each kind of asset, and the only trading that's done is to keep the percentage the same. If you have a target retirement year, you can get funds where they change the percentage as you get closer to retirement, moving away from volatile stocks and into bonds and money-market funds. Vanguard and Fidelity offer these kinds of options. Pick one that has a low expense ratio, invest steady amounts over time, and you've pretty much got no-hassle diversification.
posted by expialidocious at 12:59 PM on March 20, 2008

If you did have over $100,000, a good place to put your money is in a Massachusetts bank. The state offers insurance for the amount over the FDIC limit. More info (from the bank I happen to use for my checking, despite living in Seattle -- their eOne account not only offers an interest rate comparable to many "high yield" savings accounts, but reimburses all ATM fees).
posted by kindall at 1:01 PM on March 20, 2008 [1 favorite]

There are no worries about the FDIC failing unless the U.S. government itself ceases to exist. The government can print as much money as necessary to support the FDIC.

That's fairly disingenious. If the government were to run out of money, and had to print excessive amounts to cover FDIC insured funds we would see a massive inflation of the money supply, and those savings would essentially become worthless as hyper-inflation kicked in. Oh sure, you would get your $100,000 back, but it might only buy you a couple of cheeseburgers and a small coke.
posted by blue_beetle at 1:17 PM on March 20, 2008

Best answer: The best thing you can do with your money is invest it in yourself of your children, if you have any. Go to school, get new training, start a business, etc. After that, the next best thing to do with it is to eliminate your debt (excluding mortgage). Typically people have formulae for determining how much savings you should spend to pay down debt, but I've read your comments on Mefi, and I think you'd be a happier person if you just eliminated all of any credit card debt, car payments, etc. you have outstanding.

Barring those things, here's the basic story:

Your money in a savings account is insured up to $100,000, but earns little interest and may actually result in your losing money to inflation. CD's pay more, but you can't touch your money for the duration of the CD.

Bonds are safe, but you have to know which ones to buy, what to watch out for, etc. And bonds fluctuate in price.

The rule of thumb is that the more interest, or yield, something offers, the more risk is involved. Interest is essentially what is exchanged for you risking your money. Also, low-risk=low-reward. But you sound like you want something extremely safe, so I'm not going to preach to you about S&P 500 long term blah blah blah.

Gold and commodities are not so good, because while a 2 year chart looks great now, a 2 year chart 2 years from now might look like a nightmare. Gold lost $100/ounce since Monday, about 10%, did anybody call that? So not exactly a rock solid investment.

You want safe, here is safe:

What you really want is some kind of short term bond mutual fund (the "short term" refers to the kind of bonds it holds). Mutual funds are great because you can put in and take out your money whenever you want, unlike bonds and CDs. I would recommend this one from Vanguard (VFSTX). It has a decent yield (which is sort of like interest) and also can appreciate in value. This particular fund has had one down year in the last 24 years, and that year it was only down 0.08%.

In the alternative, you can get a fund that invests in inflation-protected treasuries (TIPS), like this one from Vanguard (VIPSX).

These two funds are very much buy-and-forget. You talk about the economic turmoil, VFSTX fluctuated less than 1% from oct to jan (when the shit really hit the fan) and VIPSX fluctuated by no more than about 4%. They are very very safe, but won't appreciate much, but that sounds that would be okay for you. Keep in mind that these funds also pay you interest along the way, which is typically reinvested, so the charts you see on yahoo, that track price only, don't show you the full story.

When you pick a mutual fund, however, you need to be very careful because different fund comapnies fund often charge expenses, loads and fees, which are basically ways for the fund company to take your money out of your investment. Vanguard has built its entire company and every one of the hundreds of funds they manage on the principle of no load, and rock-bottom expense ratios. All of the money I cannot afford to lose for the rest of my life I keep there. This is not a slick Wall Street operation - Vanguard will collapse when the world ends, not a moment sooner.

The people who started and who ran that company are very old-school personalities - they personally live frugally, invest very conservatively, and their business model is based on lifetime relationships with their investors, not on clever financial wizardry. You don't see Vanguard people on TV as much as Warren Buffet because these people aren't the type to have publicists. This is the place where your crusty great-grandfather who grew up in the Depression would keep his money. Slow and temperate. They also offer very low-cost financial advisory services, which you might need if/when you ever get married, have kids, etc and don't feel like trying to figure out how to buy life insurance.

On a psychological note, though, I would encourage you to read The Millionaire Next Door. The book is not really about personal finance, though it does discuss it a little. What the book will do is reset your social attitudes about money and wealth, and how wealth is accumulated. I think you'll really like this book.
posted by Pastabagel at 1:24 PM on March 20, 2008 [12 favorites]

it wouldn't hurt to see a financial advisor
posted by Salvatorparadise at 1:25 PM on March 20, 2008

Best answer: Could be good to check out TIPS -- Inflation-protected government savings bonds. (I'm going to get this wrong, but) The principal is adjusted based on inflation, so the rate you're getting is always the rate + inflation rate. It's as safe as you're going to get before the government itself collapses, at which point little digits in a bank account probably aren't a big deal.
posted by one_bean at 3:42 PM on March 20 [+] [!]

I think you're thinking of I-Bonds-- TIPS (Treasury Inflation Protected Securities, which Pastabagel was talking about) are different. I don't know much about TIPS at all, but I-Bonds are savings bonds that have a fixed rate (right now it's 1.20%-- the fixed rate you buy in at changes every May and November, but once you buy in at a given fixed rate, it stays the same until you sell the bonds) and then an inflation factor (based on the Consumer Price Index, changes every May and November, and changes for everyone holding an I-Bond.) The idea is that you should get 1.20% a year (or whatever the fixed rate is when you buy) above inflation. (Although if the CPI understates your experienced inflation, this might not work.)

Anyway, they seem pretty safe and easy to me, especially if you're worried about inflation. (They also have some side benefits, like not having to pay state and local taxes on interest at all, no having to pay federal taxes on interest until you redeem the bond, or not paying fderal taxes on interest at all if you use it to pay for education. On the downside, they're not too liquid-- you can't redeem them for 12 months, and if you redeem them in the first 5 years you pay a penalty. Read up on the deatils if you're interested.) I don't have any myself, but am planning to buy some this spring-- I'll wait until April to see if people predict whether the fixed rate is going up or down on May 1st.

Details here, rate information here.
posted by EmilyClimbs at 2:02 PM on March 20, 2008

Does the FDIC insure money that's not in U.S. dollars? I know that the CDIC doesn't.
posted by oaf at 2:21 PM on March 20, 2008

The CDIC doesn't insure money that's not in Canadian dollars, rather.
posted by oaf at 2:22 PM on March 20, 2008

oaf: The FDIC does cover deposits in foreign currency.
posted by ssg at 2:32 PM on March 20, 2008

Depends on the financial advisor.

Mine set me up with a bunch of mutual fund choices which over the past 9 months turned my $100k rollover into $89K, amd falling. And he was charging me 1% annually for this service.

Last week I fired him.
posted by Rash at 2:34 PM on March 20, 2008 [1 favorite]

Mine set me up with a bunch of mutual fund choices which over the past 9 months turned my $100k rollover into $89K, amd falling.

That's actually no big deal as long as you are still contributing (and thus averaging down). Prices are going to fluctuate. There is no investment that goes up every year.

I had two really good years with my 401(k) -- made 25% and 20%, respectively. Lost 20% in the last nine months. C'est la vie. (Suddenly your 11% doesn't sound so bad, does it?)
posted by kindall at 2:40 PM on March 20, 2008

Seconding Treasuries via Treasury Direct. Note, however, that yesterday the yield on 4-week notes was something like 5 cents per $100 because everyone is rushing into Treasuries. Terrible. What's worse: in a serious depression, Treasury yields will go negative. That is, people will accept a small destruction of their money to guarantee no larger destruction. Best of luck, all.
posted by fatllama at 3:32 PM on March 20, 2008

The US economy is diversified enough that your extreme bearishness is probably an overreaction. Long term, the 2000 "crash" was nothing. Stupid, greedy people lost a lot. Smart, greedy people won a lot. Smart, long term investors didn't even notice. It wasn't a crash anyway, it was a bubble popping. Even at the depths, the S&P was (and is) still trending higher than its trend.

The first guy was right- the more risk, the more reward. If the US Government fails, money is the last of your concerns. Guns, ammo and property to grow food on is what you need to worry about. So invest with the amount of risk you are comfortable with- probably treasury securities.

Kindall, what mutual funds were you in???! My 401k was up a couple of percent for 2007, up 0.8% for 2007Q4. Anyway, you're still up 25%.
posted by gjc at 7:18 PM on March 20, 2008

The 20% down is actually in a new 401(k) because I switched jobs. I have some other money that's doing somewhat better (though still down about 10%). A few of the funds I'm in are managed and not doing very well at all; I should probably move more into index funds.

Another issue is that I'm heavily in stocks when in theory I should be well into buying some bonds by this point in my life; that would have cushioned things a fair bit. But really, the market has just been rough over the last year or so.
posted by kindall at 9:06 PM on March 20, 2008

For starters, there is no way the FDIC can fail. If every bank in the US failed, the federal government can print out as many $100,000 bills as it wants and distribute them however it wants. Not that you could buy much with $100,000 in that situation.

The smartest bet is, as Pastabagel said, investing in yourself. The next safest bet is investing in the Federal government's debt, because they can always print more money, and minimizing taxation. The next safest bet and almost certainly the best hedge against anything that might happen in the world is diversity geared towards tax minimization. Personally, I'm tend towards prognostication more than a lot of people and I'm betting on further devaluation of the dollar through broad commodity indices and ADRs in a couple of companies that I'm a bit of a sweet heart of. It's not smart investing but I feel god about what I'm doing and I'm only doing short term speculation with a fraction of my assets.
posted by christhelongtimelurker at 11:03 PM on March 20, 2008 [1 favorite]

Response by poster: Thank you all for the help. This thread went very well, and you gave me some good advice.
posted by Afroblanco at 5:56 AM on March 21, 2008

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