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As an investor, you know it’s important to have a portion of your holdings in savings. Opinions differ, but most financial professionals agree that adequate savings should form the basis of any sound investment strategy. There are a number of savings alternatives that could help you accumulate adequate savings and earn a reasonable rate of return.

Certificates of Deposit

Certificates of deposit are really just short-term loans to a bank, credit union, or savings and loan. They offer a moderate rate of return and relative safety because they are insured by the FDIC for up to $250,000 per depositor, per federally insured institution, in interest and principal.

Asset Management Accounts

These accounts are much like checking accounts, except that they may be held by a brokerage instead of a bank. You can use your money to trade stocks and bonds and buy money market funds. Many brokerages will automatically sweep your earnings into a money market account.

Series EE Savings Bonds

For many years, when bonds were mentioned, people thought of U.S. savings bonds. Series EE savings bonds are only available electronically in denominations from $50 to $5,000. Tax on the interest is deferred until maturity and may be eliminated if the proceeds are used to pay for a college education.

I Savings Bonds

These bonds are designed to offer protection from inflation. By linking the return of the bonds to an inflation index, the bonds are always guaranteed to earn a fixed rate above the inflation rate. They are a sort of hybrid between Treasury Inflation-Protected Securities (TIPS), which are issued as marketable securities, and EE bonds. I bonds can be purchased at banks where EE bonds are currently sold or electronically. They are available in $50, $75, $100, $200, $500, $1,000, and $5,000 denominations. You can purchase up to $5,000 per Social Security number per year.

Money Market Funds

In a money market fund, your investment is pooled with that of other investors. The resulting fund is invested in a diverse portfolio of short-term debt securities. Money market funds offer a high level of safety and moderate income.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market funds.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Interest-Bearing Checking Accounts

These accounts combine the interest-earning capability of a savings account with the check-writing convenience of a checking account. They are offered through many banks, savings and loans, and credit unions. Some charge a fee if you fail to maintain a minimum balance.

Treasury Bills

Treasury bills are literally short-term loans to the federal government. They are sold at a discount from their face value in maturities of three months, six months, and one year. The interest on Treasury bills is exempt from state and local income taxes. Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value will fluctuate with changes in market conditions; if not held to maturity, T-bills may be worth more or less than their original cost.

How Does Inflation Affect Me?

Are you saving for retirement? For your children’s education? For any other long-term goal? If so, you’ll want to know how inflation can impact your savings. Inflation is the increase in the price of products over time. Inflation rates have fluctuated over the years. Sometimes inflation runs high, and other times it is hardly noticeable. The short-term changes aren’t the real issue. The real issue is the effect of long-term inflation.

Over the long term, inflation erodes the purchasing power of your income and wealth. This means that even as you save and invest, your accumulated wealth buys less and less, just with the mere passage of time. And those who put off saving and investing are impacted even more.

The effects of inflation can’t be denied — yet there are ways to fight them. You should own at least some investments whose potential return exceeds the inflation rate. A portfolio that earns two percent when inflation is three percent actually loses purchasing power each year. Though past performance is no guarantee of future results, stocks historically have provided higher long-term total returns than cash alternatives or bonds. However, that potential for higher returns comes with greater risk of volatility and potential for loss. You can lose part or all of the money you invest in a stock. Because of that volatility, stock investments may not be appropriate for money you count on to be available in the short term. You’ll need to think about whether you have the financial and emotional ability to ride out those ups and downs as you pursue higher returns.

Bonds can also help, but since 1926 their inflation-adjusted return has been less than that of stocks. Treasury Inflation Protected Securities (TIPS), which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, are indexed so that your return should pace with inflation. The principal is automatically adjusted every six months to reflect increases or decreases in the Consumer Price Index; as long as you hold a TIPS to maturity, you will receive the greater of the original or inflation-adjusted principal. Unless you own TIPs in a tax-deferred account, you must pay federal income tax on the income plus any increase in principal, even though you won’t receive any accrued principal until the bond matures. When interest rates rise, the value of existing bonds will typically fall on the secondary market. However, changing rates and secondary-market values should not affect the principal of bonds held to maturity.

Diversifying your portfolio — spending your assets across a variety of investments that may respond differently to market conditions — is one way to help manage inflation risk. However, diversification does not guarantee a profit or protect against a loss; it is a method used to help manage investment risk.

All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment will be worth what you paid for it when you sell.

MANA welcomes your comments on this article. Write to us at [email protected].