Here are 8 ideas that will help you make your savings work for you by taking advantage of higher interest rate and other investment accounts.
This Money Management Tips post lists some ways you can earn a little more from your money that’s just sitting in a low yield savings account.
Before we get into some of the various accounts and investments, it’s important to remember that you should always have some money available for any unexpected accidents or emergencies. You don’t want to have all of your cash tied up in investments that you can’t immediately reach.
In this post we’ll list some choices in order of how risky the investment is. Generally, the less risky an investment is the less return you’ll get. It’s up to you to determine your level of risk. We break down each investment based on risk, amount of work, liquidity of your money and potential return on investment. Balancing these categories is important to determining which investment is right for you.
1) Standard Checking / Savings Accounts
No Risk. No Work. High Liquidity. Very Low Return. FDIC Insured. 0.01-0.05%
These are your standard checking and savings accounts from most national banks. You can quickly remove money from these accounts to pay bills or to use in case of emergency.
2) High Yield Online Savings / Money Market Accounts
No Risk. No Work. High Liquidity. Low Return. FDIC Insured. 1%
These are usually online-only accounts or special accounts set up through your bank. You can usually withdrawal or transfer your money out of the account fairly easy but read the fees carefully because you can be charged for those withdrawals in some cases.
3) Certificate of Deposit (CD) Accounts
No Risk. Little Work. Medium Liquidity. Low Return. FDIC Insured. 0.5-2%
CDs are what’s referred to as a Timed Deposit. This means you deposit your money and agree to leave it in the account for a set amount of time, with longer durations generally giving higher return. Removing money early can result in fees. There is a technique called CD Laddering where you start separate 1, 2, 3, 4, and 5 year CDs. Once one of the CDs matures, you invest the money into a 5 year CD. The result is that after 5 years you’ll have a CD maturing each year.
4) Bond Index or Mutual Funds with a Brokerage Account
Low Risk. Some Work. Medium Liquidity. Low Reward. Not FDIC Insured. 1-3%
By opening a Brokerage account and letting others manage your money, the amount of work is low and you’re leaving all the investing to professionals whose job it is to pick the best investments. Since these funds are managed, there’s usually a small percentage fee associated with them. These funds are usually made up of many different investments or can be very specific in the companies the mutual funds are comprised of. For example, rather than investing in several health care companies you could invest in a health care fund that has many different health care related companies in their portfolio.
5) Purchasing Government / Treasury Bonds direct
Low Risk. Some Work. Medium Liquidity. Medium Reward. Not FDIC Insured. 1-5%
Treasury Bonds are fixed interest savings bonds issued by the government and are guaranteed to be paid out. There are Treasury Bills, Treasury Notes and Treasury Bonds. Each have different times to maturation and will have different interest rates.
6) Stock Index Funds, Mutual Funds & ETFs with Brokerage Account
Medium Risk. Low Work. Medium Liquidity. Potentially Moderate Reward. Not FDIC Insured. 6%+
This is similar to #4, but instead of investing in Bond Indexes you’re investing in Stock Index Funds and ETFs in addition to mutual funds. These generally have higher returns than other investments and depending on the fund you invest with. Research should be done to make sure the fund you’re investing in has a good history and fund managers. These funds usually have fees and minimum purchases associated with them.
7) Trading Individual Stocks
High Risk. High Work. Medium Liquidity. Potentially High Reward. Not FDIC Insured
Rather than investing in a fund that invests in many individual stocks, you’re fully in charge of buying and selling your own stocks. This means you have to do due diligence in selecting stocks you believe will give you the best return. There are fees associated with both buying and selling stocks.
8) Investing in Residential or Commercial Real Estate
High Risk. High Work. Low Liquidity. Potentially High Reward. Not FDIC Insured
This requires a high upfront investment but has the potential to provide great returns. There are several ways to invest in real estate ranging from buying, renovating and reselling a home, renting properties, buying and then leasing commercial space or Real Estate Investment Trusts (RETI).
We just want to reiterate that you should double check all fees associated with accounts and investments and do your research to make sure you know what you’re getting yourself into. Make sure you're also being smart with your money and not investing all of your savings in a very risky investment that might end up with you losing money instead of making it.
Even with a few minor changes, like opening a high yield savings account, you can potentially earn much more than you are currently if your money is parked in a standard checking or savings account.
We’ll dive into more detail for the various accounts and investments in future Money Management Tips posts.
If you have any feedback or want to share with us and others how you’ve made your money give you a better return on investment, please post in the comments!
This is part of our weekly Money Management Tips
series that aims to help you take more control of your finances. This series gives tips on everything from tracking your spending to improving your credit score.