Safe Investing

[Frederic Laureano]

AdamHayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

SAFEs have become increasingly common among startups since they were introduced by the venture capital fund and incubator Y Combinator in 2013. SAFEs have been used by countless startups for early-stage fundraising.

Originally, pre-money SAFEs were used when startups raised smaller amounts before a priced round. These were seen as early investments in the future priced round. However, as fundraising evolved, startups began raising larger amounts in seed rounds, now considered separate financing. In 2018, the post-money SAFE was introduced, allowing for a clearer calculation of company ownership after accounting for SAFE investments. This had advantages for both founders and investors in understanding the dilution and ownership stakes.

While the initial investment amount into a SAFE would not cause any tax liability for the investor when investing, its conversion into equity means it becomes taxable. When the SAFE is converted into equity shares, any gains above your original investment are subject to capital gains tax should you sell your shares. For the company, although a SAFE is not debt or equity at first, the proceeds from investors do count as taxable revenue.

The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.

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The trade-off, of course, is that in lowering risk exposure, investors are likely to earn lower returns over the long run. That may be fine if your goal is to preserve capital and maintain a steady flow of interest income.

There are, however, two catches: Low-risk investments earn lower returns than you could find elsewhere with risk; and inflation can erode the purchasing power of money stashed in low-risk investments.

An alternative to a short-term CD is a no-penalty CD, which lets you dodge the typical penalty for early withdrawal. So you can withdraw your money and then move it into a higher-paying CD without the usual costs.

Why invest: The Series I bond adjusts its payment semi-annually depending on the inflation rate. With high inflation levels, the bond is paying out a sizable yield. That will adjust higher if inflation continues to rise, too. So the bond helps protect your investment against the ravages of increasing prices.

Why invest: To mitigate interest-rate risk, investors can select bonds that mature in the next few years. Longer-term bonds are more sensitive to changes in interest rates. To lower default risk, investors can select high-quality bonds from large, reputable companies, or buy funds that invest in a diversified portfolio of these bonds.

Risk: One risk for dividend stocks is if the company runs into tough times and declares a loss, forcing it to trim or eliminate its dividend entirely, which will hurt the stock price.

Why invest: Like a bond, preferred stock makes a regular cash payout. But, unusually, companies that issue preferred stock may be able to suspend the dividend in some circumstances, though often the company has to make up any missed payments. And the company has to pay dividends on preferred stock before dividends can be paid to common stockholders.

Risk: Preferred stock is like a riskier version of a bond, but is generally safer than a stock. They are often referred to as hybrid securities because holders of preferred stock get paid out after bondholders but before stockholders. Preferred stocks typically trade on a stock exchange like other stocks and need to be analyzed carefully before purchasing.

A money market account may feel much like a savings account, and it offers many of the same benefits, including a debit card and interest payments. A money market account may require a higher minimum deposit than a savings account, however.

Risk: Money market accounts are protected by the FDIC, with guarantees up to $250,000 per depositor per bank. So money market accounts present no risk to your principal. Perhaps the biggest risk is the cost of having too much money in your account and not earning enough interest to outpace inflation, meaning you could lose purchasing power over time.

An annuity is a contract, often made with an insurance company, that will pay a certain level of income over some time period in exchange for an upfront payment. The annuity can be structured many ways, such as to pay over a fixed period such as 20 years or until the death of the client.

With a fixed annuity, the contract promises to pay a specific sum of money, usually monthly, over a period of time. You can contribute a lump sum and take your payout starting immediately, or pay into it over time and have the annuity begin paying out at some future date (such as your retirement date.)

Why invest: A fixed annuity can provide you with a guaranteed income and return, giving you greater financial security, especially during periods when you are no longer working. An annuity can also offer you a way to grow your income on a tax-deferred basis, and you can contribute an unlimited amount to the account. Annuities may also come with a range of other benefits, such as death benefits or minimum guaranteed payouts, depending on the contract.

Government bonds offer fixed terms and fixed interest rates. Treasury bills, commonly known as T-bills, have maturities of four, eight, 13, 26 and 52 weeks. Treasury notes come in maturities of two and 10 years. Treasury bonds have maturities of 20 to 30 years.

Money market mutual funds are highly liquid, ultra-safe mutual funds that are a popular choice for short-term cash management needs. They hold short-term debt securities with high credit quality, such as Treasury bills, commercial paper and certificates of deposit (CDs).

Sold in terms of five, 10 or 30 years, Treasury Inflation-Protected Securities (TIPS) are government bonds that do precisely what their name suggests: Protect your money from the ravages of inflation.

With TIPS, the value of your principal rises or falls over the term of the security, depending on the current rate of CPI inflation. The interest rate on each security is fixed, but since the principal fluctuates in value, your interest payments also rise and fall.

At maturity, if the principal is higher than your original investment, you keep the increased amount. If the principal is equal to or lower than your principal investment, you get the original amount back. TIPS pay interest every six months, based on the adjusted principal.

While the options listed above offer unbeatable liquidity, no other safe investment offers the ease of access you get with a high-yield savings account. Deposits of up to $250,000 are insured by the Federal Deposit Insurance Corp., which ensures they are ultra-safe investments.

A high-yield savings account is a type of savings account that typically offers higher interest rates than a traditional savings account. The best high-yield savings accounts are typically offered by online banks and credit unions.

While these qualities make CDs a very safe investment, they are not considered to be very liquid assets. They offer a range of terms, from three months to ten years, but withdrawing the principal ahead of the maturity date often means paying early withdrawal penalty fees or forgoing interest payments

Investment-grade corporate bonds are fixed income securities sold by companies to fund their operations. These types of fixed-income securities are highly rated by credit rating agencies, which evaluate the financial health of the issuing companies. Investment grade means the companies are very likely to pay you interest and return your principal.

If companies run into trouble, they could face credit rating downgrades, which could possibly make their bonds no longer investment grade. In exchange for these higher risks, potential returns are better than the options above. And the market for investment-grade corporate bonds is considered to be very liquid.

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