How safe is the money in my bank account?

We have about $26,000 in GMAC Demand Notes which are not insured. We are really worried about leaving it in there, but we are making over 4 percent with it and can’t find anyplace else to put it that is paying decent and doesn't tie it up. We are 57 and 53. Should we leave the money in the demand notes? If not, what should we do with it?
— Sue O., Auburndale, Fla.

We don’t give advice on specific investments. (Even if we did, it’s probably not a good idea to get investment advice from some guy on the Internet you’ve never met.)

But in general, higher returns come with higher risk. That's why long-term certificates of deposit or 30-year Treasuries usually pay a little more than a shorter-term equivalent; they come with slightly higher risk. Even if there’s no higher risk of losing your money altogether, locking your money up for a long time carries the risk that interest rates will go up and you’ll miss the chance for higher returns.

So the question you have to ask is whether is extra return you’re getting on your demand notes is high enough to adequately compensate for the added risk over, say, an insured CD. That’s a tough call. But to answer the question, you need to take closer look at what your risks are.

In the case of GMAC demand notes, not only are these not insured, they’re also unsecured. That means there are no assets specifically designated to be used to pay them back if the company ran into trouble. So you’re betting on whether or not General Motors can pull through its current financial trouble by managing costs and shifting its product line to keep up with changes in sales patterns that have resulted from rising gasoline prices. If you’re not familiar enough with the company’s operations to make an educated guess about the outcome, your risk is higher than someone else who’s able to make that judgment.

The worst case for unsecured debt is that the company files for bankruptcy and holders of secured debt are in line ahead of you when the bankruptcy judge decides who gets paid first. With the recent downturn in the economy and the slump in car sales, the prospect of a General Motors bankruptcy has gone from more or less unthinkable to highly unlikely, but still possible, especially if gasoline prices keep climbing and sales of trucks and SUVs keep falling.

You also have to ask yourself how much risk you personally can afford to take. Someone just starting out, with 30 years to build a retirement nest egg, can afford to take on more risk because they’ve got time to rebuild if they lose their money. As you get closer to retirement, your risk is has a bigger impact than it does for a 30-year-old — but you don’t get compensated for that with a higher return.

A lot depends on how much you’re going to rely on these demand notes to pay retirement expenses. Someone with a generous pension or a sizable annuity can afford to take a little more risk with a portion of their nest egg. If this is money you’re going to need to pay bills, that will limit the risk you can afford to take.

Shopping around for the best yield is always a good idea. But if chasing higher yields means taking on more risk, it may not be worth it.

As Will Rogers put it, the return of your money can be more important than return the on your money.

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