If you’ve got a savings account, you can relate to this week’s question…
A retired couple in their late sixties. IRA money languishing in low-return CDs. We want safety, but we need a decent return! What to do?
Here’s your answer, Terry!
When times are tough and unemployment high, Uncle Sam does what he can to help out. And one of the main things he can do? Keep interest rates low in hopes of getting consumers to borrow and spend. Since consumer spending makes up two-thirds of our economy (business spending making up the rest), when we spend more, our factories produce more and, hopefully, hire more.
While our economy is vastly improved since the dark days of the Great Recession, and interest rates have come up a smidge, they’re still low by historical standards. And as we all know, while low rates are great for borrowers, they’re tough on savers, especially those who depend on the interest from their savings to stay alive.
So what’s a saver to do?
I wish there were a magic bullet, Terry. I’d love to be able to tell you there are rock-solid ways to beat the banks without risk. Unfortunately, I can’t. Beating the interest rate on bank CDs is easy enough. But there’s no free lunch — you can’t do it without taking some degree of risk.
There are, however, ways to earn more with a manageable amount of risk. I do it, and so can you.
We’ve written about this a lot, most recently in “How to Earn More on Your Savings for the Rest of 2017.” You should read that entire article, but here’s a quick overview:
1. Shop around
If you’re going to stick with insured savings, at least make sure you’re getting the highest rate possible. We have an online search for rates that you can use to compare rates nationwide. But don’t end your search there. Smaller local banks and credit unions can have higher rates than the big guys that show up in these search engines, so check local deals too.
2. Invest in stocks
Investing in stocks is obviously riskier than putting money in an insured savings account, but the rewards can be much greater.
Stocks don’t pay interest, but some pay dividends, which amounts to the same thing. Find a good, solid company with a decent dividend, and you can earn multiples of what banks are paying and have some upside potential as well. For example, as I write this, Verizon’s stock is paying nearly 5 percent in dividends. So is AT&T’s. You can do a quick web search for “best dividend stocks” and find plenty of articles with ideas.
The cool thing about stocks is that not only can they go up in value, but the dividends often increase over time, so you’re automatically keeping up with inflation.
Granted, there’s obvious risk in this, or any, stock, so you don’t want to put all your eggs in this one basket and you do want to choose your investments carefully. But it’s a pretty safe bet that giant companies like Verizon and AT&T aren’t going out of business any time soon, and it’s unlikely their dividends will go down. To learn more, check out “How Dividend Stocks Can Help You Beat the Bank.” It’s an older article, but it still applies today.
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 and exchange traded funds, also known as ETFs. With a mutual fund, your money is pooled with other investors’ money and invested into a big basket of stocks, bonds or both.
There are dozens of mutual funds and ETFs available that invest in just about every kind of security, from government bonds to Chinese stocks. The risk in mutual funds obviously will coincide with the risk of the investments they hold. But a mutual fund is a good way to get a bunch of stocks for the price of one. Example? The Vanguard High Dividend Yield ETF holds a portfolio of dividend-paying stocks. As I write this, it’s paying about 3 percent in dividends, and over the last 10 years its overall return has averaged about 7 percent per year.
Bonds are basically IOUs from companies or federal and state government agencies. As with a bank CD, when you buy bonds, you’re loaning money and earning interest. 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 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 peer-to-peer lending sites. You fund a portfolio of small loans and earn interest.
In articles such as “Earn More on Your Savings Through Peer-to-Peer Lending,” you can learn more about this investment method, along with its drawbacks. And whether you’d like to lend money to earn more interest, or borrow money this way, you can find companies that will help on the Personal Loan page of our Solutions Center.
6. Real estate
A few years ago, I went in with a friend and bought the house next door to mine. We remodeled it, rented it out as a vacation rental, then sold it for a nice profit a couple of years later. While we held it, we were earning about 5 percent on our investment after expenses. Like the ideal dividend stock, we earned some income, then sold the appreciated asset.
The downside? Fixing up houses is expensive, stressful, and time-consuming. So is keeping them rented. But I bought the house because I believed the market was right (this was in 2012 when we published this piece: “Housing Has Bottomed – It’s Time to Buy”). In addition, since the money I used to buy it was languishing in a bank account earning less than 1 percent, I didn’t see a lot of downside.
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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