Five Easy Ways to Make Your Money Work for You
You know that phrase, “It’s easy for the rich to get richer”? It’s become more and more prevalent in today’s conversation about the wealth gap that exists between various socio-economic demographics, yet the phrase itself is very rarely explained in detail when it gets used. More often than not, finance gurus tend to leave the subject at “Just invest!” when they both can and should be explaining how and why money should be used in different ways. Instead of offering advice or explaining some of the different assets they’ve put money into, high-wealth people seem to be the masters of changing the subject and avoiding the task of describing the usually simple tactics that they employ to make them money.
Rich people always seem to be telling everyone that the best way to accumulate wealth is by “making your money work for you” in some way or another. But, when they say that, they often don’t explain how to make your money get a job and pay you, nor do they tell you what jobs the cash you have sitting around might do for you. More seriously, the advice for what can be done with spare cash that you might just have lying around is very limited at best, and the reality is there are so many ways that your money can be used to make you more money.
Number One: Going in order of most safe to least safe, there’s the traditional savings account. Bear in mind that, as risk increases, so does reward. A typical savings account earns the bare minimum in interest, about a tenth of a percent on average, if that. In other words, if you put one hundred dollars into one today, and your interest rate never changed, it would take around ten years to make a dollar on your money. Obviously, with more money would come higher returns, but the ratio would be exactly the same. And, with inflation affecting the value, or spending power, of the dollar, you’d technically be ending with LESS money than you started out with. That being said, it is a safe and secure way to store your money, and there is SOME money being made on it, if only the slightest bit. Additionally, it is also one of the most liquid alternatives to cash, meaning that you have near-constant access to your money should you ever want or need it.
Number 2: One of the safest ways to start investing money is in the bond market. Purchasing bonds, particularly government bonds, are considered the least risky of all investment, and pay out returns that hover around 2%. There are two main types of bonds that you might consider investing in. Treasury bonds are issued and backed by the Treasury of the United States of America, which means that you are guaranteed to get your money back, plus the return, when the bond matures. Alternatively, you can invest in corporate bonds through an online broker, which are built around the same premise as treasury bonds, but the guarantee that the Treasury offers with a government bond is not part of the equation, which means that companies can default on the bond and pay you absolutely nothing if the cash isn’t available. That being said, with higher risk comes higher reward, and a typical corporate bond returns closer to the 3% - 4% range. To invest in bonds, you can either buy them directly from the Treasury at treasurydirect.gov, or you can purchase them through an online broker.
Number 3: Money can be invested into the stock market in a lot of ways, and, because investing is such a diverse topic, we’ll break it down into three main types of “safer” investing that isn’t quite as risky as some of the other forms of investment. The safest way to invest money is in some form of IRA account, preferably a Roth IRA. This type of investment account allows you to contribute up to a certain amount of money annually, which then will remain invested until you reach the age of sixty five. At this point, you can take as much or as little money out of the account as you’d like without being taxed or fined. If you take money out beforehand, you are subject to taxes, fees, and other financial penalties. This type of account is perfect for establishing a retirement fund, as most Roth IRA accounts return approximately 7% every year. As more and more money gets invested, these returns start to generate some significant wealth for your retirement, making it entirely possible for anyone and everyone to retire as a millionaire. To set up and invest in an IRA, most major trading platforms, like TD Ameritrade and Betterment, offer free and simple instructions to creating an IRA and getting your money working for you.
Number 4: Another way to consider investing money is in a reputable and previously successful ETF or Index Fund. These types of investments do not have the same drawbacks as an IRA, but their gains are taxed each year. That being said, there are no early withdrawal penalties, and you’re likely to receive approximately eight to ten percent return on your investment, and that money can be taken out of the account at any time, giving you the opportunity to reinvest your return into something higher risk, or leave it in the fund to return another 8% to 10% the next year. To invest in one of these types of funds, you can make an online brokerage account, deposit money, and get started in the stock market in less than a week. As with an IRA, it’s simply a matter of choosing a brokerage that looks best to you and following free, step-by-step instructions to creating and funding an account.
Now, before we get to number five, you may be asking yourself whether or not it’s worth putting money into any of the first four methods of making money work for you. The returns that we’ve described so far range from a fraction of a percent to ten percent at best, which doesn’t seem like that much of a return on your money. If you invest one hundred dollars into any of these, the most you might be able to get out is ten more dollars every year? That isn’t very much. But, while that may be true, it’s important to remember a couple of things. First, none of these percentages are guarantees, they’re simply averages. Some years may return higher than ten percent, and others lower. There is very little guarantee, and the reward lies in making the right investment at the right time. Second, the less money you start with, the less you’ll make. That phrase about the rich getting richer? Ten percent on their investments may mean thousands, or even hundreds of thousands of dollars, depending on how many small fortunes they’ve invested. The return, proportionally, is the same, but the numbers are different. The less money you have to begin investing with, the less it will feel like you’re making, even if you’re earning consistent returns. To combat that, set yourself a goal for how much you plan on investing. If you plan on one thousand dollars a year at approximately ten percent return, you’ll find yourself with quite a pile of additional gains on top of your principal investment. At five thousand a year? That’s some serious cash in five, ten, fifteen, or twenty years. But, if these styles of investing aren’t for you, then let’s take a look at number five.
Number 5: The riskiest, albeit most controllable and entertaining, way to invest is to put your spare cash into individual stocks. This differs from investing in an ETF or index fund because the money goes exclusively into the stocks you choose, rather than a carefully selected portfolio of stocks that you own a fraction of a fraction of a percent of. Investing in this manner offers a fair amount of both pros and cons, all of which should be considered before making any decisions. The pros to this list are simple. Individual stocks are volatile, making them high returners if you choose the right ones and respond to economic conditions correctly. As a rule, most big-name, S&P 500 individual stocks follow the higher end of market returns, averaging 13% to 15% over the past few years, although some have returned 20%, 30%, or even over 100%. The key to making these investments is to observe market trends and global events, as they can have massive impacts on stock performance. The COVID-19 pandemic, for example, caused most digital stocks, like Zoom and Docusign, to spike in exponential ways, creating some serious gains for people who got in early. The cons to investing in this sector of the stock market all revolve around the same volatility that makes the individual stock market a great investment. For every stock that goes up, another goes down. For every five good days, there are another three bad days. Returns are neither linear nor guaranteed, making individual stocks a dangerous, albeit fun game to play. To get started, follow the same steps that are involved in investing in an ETF or index fund, but put your money into individual stocks, like Apple or Nike, that you’re both familiar with and comfortable investing in for a long period of time.
These are five of the best and easiest ways to make your money work for you in some way or another. There are infinitely more ways, all with varying degrees of risk, to use your money to make more money for you, and we’ll cover some of those in other posts, but these are simple, low-risk, and consistently-returning investments that offer you financial security and the ability to make your wealth grow at an exponential rate.
