Photo (cc) by 401(K) 2012
Your interest rate really matters.
Invest $100 a month into a savings account and earn 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.
In the video below, CPA and former investment adviser Stacy Johnson shares six ways to earn more on your savings. Check it out, then read on for more…
Now let’s delve into the details on 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 second quarter of 2012. The best rate they found was a measly 0.85 percent.
But no matter what the rate is, it makes sense to earn the highest possible. There’s no reason so settle for .4 percent if you can earn .8. You can compare rates for most banks online: we have an online search for rates. 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 these search engines, so check local deals also.
2. Invest in stocks
Investing in stocks is obviously riskier than putting money into an insured savings account, but the rewards can be much higher. In the video, Stacy offered AT&T as an example. At its recent price of $37 per share, the $1.76 dividend amounts to 4.7 percent. (The percentage return you earn with dividends is calculated by dividing the annual dividend by the stock price.) That’s about 5 times the best interest rate MoneyRates.com found on a savings account.
Not all stocks pay dividends, and among those that do, not many are as rich as AT&T’s. And while stocks have the potential to go up in value, they can also go down. So you should never invest money you’ll need within 5 years, and you should always do plenty of research before investing. To learn more, check out How Dividend Stocks Can Help You Beat the Bank.
Investing in stocks isn’t as easy as a trip to the bank. For example, just opening a brokerage account can seem a hassle, and the amounts required to buy 100 shares of a stock could exclude those with modest means. But there are ways around both issues. For example, in 4 Ways to Invest Without Much Money we explain 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:
- Sharebuilder – $4.00 for automatic investments, $9.95 per trade, no monthly fees
- Zecco – $4.95 per trade with no investment minimums
- FOLIOfn – $29 monthly or $290 a year with no investment minimums
- BuyAndHold.com – $6.99 per month with two free trades and no investment minimums
3. Mutual funds
One of the keys to investing on Wall Street is diversification: spreading your money out over a group of stocks or bonds is safer than just buying one or two. That’s the idea behind mutual funds. With a mutual fund, your money is pooled with other investors and invested into a big basket of stocks, bonds or both.
There are dozens of mutual funds available that invest in just about every kind of security, from government bonds to Chinese stocks. But for a solid, American-based stock investment, Stacy recently recommended the Vanguard 500 Index Fund. From Ask Stacy: How Do I Get Started Investing?…
One fund to consider is the Vanguard 500 Index fund. As the name implies, it owns the shares of 500 of the largest companies in America. The minimum investment is $3,000, but it costs nothing to buy or sell shares in the fund. There is an annual management fee, but it’s only 0.17 percent – pretty small for a mutual fund. The fund, like the stock market overall, hasn’t done well over the last 1, 5, or 10 years. But it’s averaged better than 10 percent per year since its inception in 1976.
As Stacy said in the video, bonds are basically IOUs from companies or federal and state government agencies. When you buy bonds, you’re basically 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 prior to maturity for its then-current market price.
Bonds are generally considered to be lower risk than stocks, and as a result don’t offer as high a potential for reward. But many low-risk bonds still offer a higher interest rate than you’d earn from 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 in return. In the video, Stacy interviewed a man who has been doing this since 2009 and has thus far has earned 13.26 percent on his money.
As you might expect, this investment model isn’t without risks. In 4 Things to Know About Peer-to-Peer Lending, we covered three things 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 we looked at, 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:
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. Stacy’s been investing in real estate for decades: as he said in the video, he hopes to earn 5 percent on his most recent rental house, plus the opportunity for gains should housing rebound.
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.
The projects you lend to are screened in advance, and the default rate is much lower than you’d imagine. Still, there’s always the risk that a good loan goes bad. In Beating the Banks: Microloans, Stacy interviewed a man who invests with one microloan agency – Microplace. Check it out to hear his story and read more about microloan investing.
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.