8 ways to earn more on your savings
Interest rates for savers aren't very appealing these days -- less than 1% on most bank accounts. Here are some ideas to earn more with your money.
This post comes from Angela Colley at partner site Money Talks News.
Your interest rate really matters. Put $100 a month into a savings account and earn 0.45%, and in 10 years you'll have $12,377. But if you invested that same $100 in a stock portfolio that earned 4.7%, 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, Stacy Johnson, who's a CPA and former investment adviser, shares six ways to earn more on your savings. Check it out, then read on for more.
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 of the best interest rates on savings accounts for the second quarter of 2012. The best rate they found was a measly 0.85%.
But no matter what the rate is, it makes sense to earn the highest possible. There's no reason so settle for 0.4% if you can earn 0.8%. You can compare rates for most banks online. Small local banks and credit unions often have higher rates than the big banks that show up on search engines, so check local rates too.
2. Invest in stocks.
Investing in stocks is obviously riskier than putting money into an FDIC-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%. (The percentage return you earn with dividends is calculated by dividing the annual dividend by the stock price.) That's about five 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 five years, and you should always do plenty of research before investing. To learn more, see "How dividend stocks can help you beat the bank."
Investing in stocks isn't as easy as a trip to the bank. For example, opening a brokerage account can seem like a hassle, and the amounts required to buy 100 shares of a stock could exclude those with modest means. But there's a way around both issues: direct investing or buying stock directly from companies in increments as small as one or two shares. First Share has a list of some of the companies that offer direct investments.
3. Invest in mutual funds.
One of the keys to investing on Wall Street is diversification: Spreading your money 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 that of other investors and invested in a big basket of stocks, bonds or both. For instance, one fund that Stacy recommends is the Vanguard 500 Index Fund.
4. Invest in bonds.
As Stacy said in the video, bonds are basically IOUs from companies or government agencies. When you buy bonds, you're basically lending 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. Invest with 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.
As you might expect, this investment model isn't without risks:
- Nothing is insured. The borrower may default on the loan. If it goes to collection, you'll pay a fee of up to 35% of the amount collected.
- Risks and rewards are flexible. The more risk you're willing to assume, the more you can possibly earn. For example, on one site we looked at, rates varied from 7.39% to 23.48%, depending on creditworthiness of the borrower.
- Requirements vary. Some sites only accept people with certain income levels, and others accept lenders only from certain states.
6. Invest in 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 has been investing in real estate for decades. As he said in the video, he hopes to earn 5% on his most recent rental house, plus the opportunity for gains whenever housing rebounds.
7. Invest in microloans.
A relatively new concept, microloans are a way to help others while you help yourself. You make small loans to entrepreneurs around the world and 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 expect. Still, there's always the risk that a loan will go bad. (See "Beating the banks: Microloans.")
8. Invest in collectibles.
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 a properly curated collection can be a moneymaker.
Stacy interviewed two brothers who recently auctioned their collection of cars, mechanical musical devices and other goodies for nearly $40 million. They had some good advice for anyone interested in collecting for fun and profit.
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