The point of this article is about Safe Money, and to demystify what annuities are and what they are not!

You can do three things with money.

Spend it.
Save it.
Invest it.

Many people get confused with which of these seemingly basic aspects about money. It is not that difficult. You have an income, you have bills. I hope that your bills are less than your income. If not, sit down and create a budget. Write down everything you are spending money on. See where you can cut back. It is all too easy to spend more than you have. There are other places you can go to further study how to create budgets and gain control over what you are spending, but it really is that easy. Either earn more money, or reduce your spending, if you do not have enough money left to save, or invest each month.

Saving money; just what does this mean? When you save money, you want to have no risk of losing your principal.

The principal, is the actual money you want to save, and can be called premium. When you “save” money, you normally earn an interest rate. The “economy” or the “market” going up or down or sideways or whatever, has no effect on the value of your savings. You will be credited interest to your savings in the amount of the interest rate, or coupon you are paid on the amount of principal you have saved. You do have a “time” factor involved with the amount of your earnings, however. Normally, the amount of time you commit to saving your money, and not pulling it out of savings and spending it, determines the amount of interest you will earn on your deposit. The longer period you commit to saving your money, the higher the interest you are paid, in most economic conditions. There are times, when we have what is called an “inverted” yield curve, that this would not be the case, but most often, the shorter the time frame you deal with, the lower the rate of return you receive. For instance, I just looked at bankrate.com, and the 6-month CD average is paying 1.52%, the 1-year CD is paying 1.99% and the 5-year CD is paying 2.61%. Annuities are paying on average, 3-year maturity at 3.3%, a 4-year at 3.8% and a 5 year at 4.5% return, tax deferred.

Investing money; the risk goes with the investor. When you invest money, your money is at the risk of market and economic conditions. This article is being written in March, of 2009. Anyone who was invested in the “market,” or has a typical 401K, or IRA, knows the risk of investing. People invest because they want to have the possibility of a significant gain in the value of their investments. I have seen many cycles in the economy, and people can be caught up in the false reality that the market will only go up. It seems as though many of the investment houses preach that false reality. The mantra of a “diversified “portfolio was used to lull people into a false sense of reality. Diversification, meaning to position your portfolio in many different sectors of the economy, and thereby avoid losses in all or your portfolio if one sector of the economy does not perform well showed its ugly brother. What happens if the entire economy goes down? You know the answer to that, and if you do not, just look at the value of your “investment” portfolio. I can tell you, it is down. Way down.

What is a key fact about the money you save or invest? They are liquid assets. What are liquid assets? Stocks, Bonds, Mutual Funds, Variable Annuities, CD’s, and Government issued notes, Annuities. Just about anything you have saved or invested is a liquid asset. Liquid means that you can get your hands on your money in very short order if you want it? There may be a gain, or a loss with some of the instruments listed, but you can sell them, and get your money on demand.

CD’s are time sensitive savings certificates issued by banks. They have a rate of return, or interest rate paid, based on the length of time you deposit your money. There is usually a penalty for withdrawing your money before the maturity date. There is no penalty if you hold the CD until it matures. The purchaser must pay taxes on the income they are paid from the interest income generated every year from their CD portfolio. I think the reason people buy a lot of them, is that they are easy to buy. Just go down to the bank and buy it and forget it. You cannot lose money unless you have over the FDIC limits in one bank and the bank goes out of business or you remove money before final maturity.

Annuities are time sensitive savings contracts issued by insurance companies. They have a rate of return or interest rate paid, based on the length of time you deposit your money. Like the CD, there is usually a penalty for withdrawing your money before the maturity date. There is no penalty if you hold the annuity until it matures. The purchaser is allowed to defer paying taxes on the interest income generated every year from their annuity. In this way, they are paid interest on the interest generated by the annuity each year, allowing it to grow. You cannot lose money unless you have over the State Insurance limits and the Insurance company out of business, or you remove money before final maturity.

You see, the CD and the Annuity are very similar. They both pay interest to the holder based on time. They both have a penalty if you take out your money before it matures. The main difference is the Tax Deferral: Earnings are sheltered from annual taxation just like an IRA in the annuity.

Are insurance companies safe? Insurance companies are required to keep a certain level of reserves on hand to ensure your money is safe. Many insurance companies in the industry are stronger than ever today, which makes an investment in those companies very solid. In addition, each state has a guaranty fund to back up deposits with insurers. For the most part, that coverage is limited to 0,000 but each state is different so it is best to look in to the laws of your state.

Unlike CD’s, annuity contracts have an annual free withdrawal provision giving the account holder access to 10-15% of the account value annually without penalty. Annuities really are a Safe Money savings vehicle.