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Cash Investments Risk vs. Return Default risk is the risk that an individual creditor will not be able to pay its debts. Default risk is usually very low with cash investments: Click on each of the features on the left for the Default Risk. Treasury Bills & Savings Bonds       Direct obligations of United States federal government. CDs, Money Markets & Checking Accounts       Usually carry protection against default through FDIC (Federal Deposit Insurance Commission) insurance. Since the risk of losing money due to performance is very small, this is not a big concern when investing in a cash investment. The biggest concern with a cash investment is the loss of purchasing power over the long term. This is referred to as inflation risk.   Quick Question How do people go broke safely? Assume that the annual rate of inflation is 3%, and that your federal income tax rate is 25%.   Rate of Return After Income Taxes Rate of Return After Income Taxes and Inflation Monica's investment earned 3% 2.25% (3% less 25%) -.75% (2.25% less 3%) Jeff's investment averaged 8% 6.0% (8% less 25%) 3.0% (6% less 3%) See the Cash Management Course — Reducing Taxes for more information about tax implications. This means you may need to be careful how much you invest in cash investments. With the rate of inflation rising and falling, and with interest rates increasing and decreasing, over the long term you may lose ground financially to increasing prices (inflation). Historically, some items such as college costs and certain medical expenses increase at a much faster rate than the average rate of inflation. This means that if you are saving money in cash investments for those purposes you may be losing ground. Historical returns of investments are often assessed by using an "index." An index allows one to view the historical returns of Treasury Bills, the inflation rate and so forth. We may also compare the historical returns on cash investments against those of other types of investments. Historically, cash investments, represented here by U.S. Treasury bills, have had much lower returns than bonds or stocks. Equity investments are generally more volatile than government bonds and Treasury bills. CDs are federally insured up to $100,000 per account, per institution. Treasury bills are guaranteed by the government for repayment of interest and principal if held to maturity. < PREVIOUS NEXT > #40101