Your interest rate really matters.
Invest $100 a month in a savings account that earns 0.45 percent, and in 10 years you’ll have $12,377. But if you invested that same $100 into a stock portfolio that earned 4.7 percent, you’d have $15,527. That’s an extra $3,150. Do it for 25 years, and beat the bank by more than $25,000.
Now let’s delve into the details of making your money work as hard for you as you do for it.
1. Shop around for savings accounts
Recently, MoneyRates.com conducted a survey on the best interest rates on savings accounts for the first quarter of 2015. The best rate they found was a mere 1.05 percent.
You can compare rates for most banks online. But don’t end your search there: Smaller local banks and credit unions often have higher rates than the bigger banks that show up in search engines, so check local deals.
2. Invest in stocks
Stocks are obviously riskier than putting money into an insured savings account, but the rewards can be much higher. Money Talks News founder Stacy Johnson uses Wells Fargo as an example: While the institution doesn’t pay much on savings accounts, the last time Stacy checked, it paid 2.7 percent on its stocks.
Now, the risks and the drawbacks.
Not all stocks pay dividends, and while stocks have the potential to go up in value, they can also plunge. So never invest money you’ll need within five years, and always do plenty of research.
If you want to see what Warren Buffett considers the top 10 dividend-paying stocks for 2015 – and who wouldn’t? – check them out here.
Investing in stocks isn’t as easy as a trip to the bank. Opening a brokerage account can be a hassle, and the amounts required to buy 100 shares of a stock could exclude those with modest means.
But there are ways to work around anything. For example, in 4 Ways to Invest Without Much Money, MTN explains direct investing: buying stock directly from companies in increments as little as one or two shares. First Share has a list of some of the companies that offer direct investments.
Other ideas to start with small sums:
- Capitol One Investing (formerly ShareBuilder) – $6.95 per trade, no investment minimums
- TradeKing – $4.95 per trade with no investment minimums
3. Mutual funds
One of the keys to Wall Street investing is diversification; spreading your money over a group of stocks or bonds is the safest way to go. That’s the idea behind mutual funds. With a mutual fund, your money is pooled with other investors and invested in stocks, bonds – or both.
There are dozens of mutual funds available that invest in every kind of security. But for a solid, American-based stock investment, Stacy recommends the Vanguard 500 Index Fund. The fund’s minimum investment is $3,000. According to the fund’s website:
As the industry’s first index fund for individual investors, the 500 Index Fund is a low-cost way to gain diversified exposure to the U.S. equity market. The fund invests in 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. stock market’s value. The key risk for the fund is the volatility that comes with its full exposure to the stock market.
Bonds are basically IOUs from companies or federal and state government agencies. When you buy bonds, you’re loaning money. The money you loan earns interest, and you can either hold the bond until it matures or sell it on the open market before maturity for its market price.
Bonds are generally considered lower risk than stocks, so they don’t offer as high a potential for reward. But many low-risk bonds still offer a higher interest rate than a bank. The safest bonds are those issued by Uncle Sam: read about them at TreasuryDirect.
5. Peer-to-peer lending
With peer-to-peer lending, you’re the bank. Individuals post loan requests on different peer-to-peer lending sites. You fund the loan and earn an interest rate.
This investment model isn’t without risks. In 4 Things to Know About Peer-to-Peer Lending, MTN urges you to consider:
- Nothing is insured: The borrower may default on the loan. Even if they eventually pay, if it goes to collection, you’ll pay a fee of up to 35 percent of the amount collected.
- Flexible risks and rewards: The more risk you’re willing to assume, the more you earn. For example, on one site MTN researched at the time, rates varied from 7.39 to 23.48 percent, depending on credit-worthiness of the borrower.
- Requirements: Some sites only accept people with certain income levels, and others accept lenders only from certain states.
If you’re ready to head into peer-to-peer lending, check out:
- Prosper: You can invest as little as $25, but Prosper recommends investing a minimum of $10,000 to create a well-diversified portfolio of at least 400 loans.
- Lending Club: Lending Club is “the world’s largest online marketplace connecting borrowers and investors,” according to its website.
6. Real estate
If you have the money, time, expertise and patience, real estate can be a good long-term investment.
But as a child of two landlords, I can tell you this isn’t easy money. Rental housing takes time and effort, tenants can be a hassle and you’ll have to deal with repairs – but the rewards can make it worth it.
Interested in becoming a real estate investor? Check out 15 Ways to Find, Buy and Rent Real Estate for tips to get started.
A relatively new concept, microloans are a way to help others while you help yourself. You make a small loan to entrepreneurs around the world – they use the money to fund projects ranging from farming in the Dominican Republic to green businesses in Argentina.
In banking terms, a microloan is a small loan ranging from $500 to $100,000. Historically, banks in the United States haven’t particularly liked dealing with microloans as they have not been profitable.
One of the benefits of microloans is the availability of business resources and counselors to help your success. A microlender can help with business plans and provide guidance, according to kabbage.com.
Most people collect things just for the sheer joy of ownership. I have a pretty large Star Wars collection, and while I couldn’t imagine parting with my life-sized Yoda or original AT-AT model, a properly curated collection can be a money-maker.
For example, check out Tips on Collecting From Some of the World’s Best, where Stacy interviews two brothers who recently auctioned their collection of cars, mechanical musical devices and other goodies for nearly $40 million. They have some good advice for anyone interested in collecting for fun or profit.
Hiram Reisner contributed to this report.