Whether you’ve saved it up, inherited it, or received it as a gift from family, if you have some money saved up and you don’t know what to do with it, the best thing to do is to invest it. No, I’m not saying to buy land, gold, or foreign currencies. I’m not even saying you have to trade stocks. What I’m saying is that you should learn about how to invest your money so that it grows while you age.
Money Market Account
Even if you decide to invest in the stock market, you should have a money market account when you need to run for safety. If you’re unfamiliar, a money market account is a fancy savings (or checking, depending on the bank) account that has a higher interest rate. It’s not something to have around like a regular savings account unless you plan on having larger amounts of money saved in it, though.
Do some shopping around. You will find that plenty of banks offer this kind of account. However, if you have an account for investments with banks like TD Ameritrade, Charles Schwab, or e-Trade, then it might be beneficial to see what kind of rates they offer. Otherwise, there’s a lot of banks to go through and compare. See if your local credit unions offer one, too. The best rates with the least amount of fees is usually a good choice.
Learn About Stocks and Options
If you put in the time to learn about stocks, you will learn that it’s not all that people told you growing up. Obviously, you just need to know what you’re doing in order to make money. If you aimlessly throw money into Zynga, you’re going to lose it. However, if you make a calculated risk, understanding that a stock is going to go down, you can actually do something called shorting a stock and make money when the stock goes down.
Options are another way of how this can be done. What’s the point of me telling you this? Well, it’s common knowledge that there are certain anomalies in the stock market when many stocks tumble and shoot back up (e.g. the January effect, the holiday effect, etc.). The pros on Wall Street know this and make a good amount of money with it. They also know that they have to constantly monitor their investments and adjust their trades accordingly. It takes a lot of research, time, and data manipulation. But if you do it, this is hands down the best way to invest and grow your money.
Certificate of Deposit (CD)
Many people will turn to CDs because of the appeal of low risk. If you don’t mind making next to nothing over the course of five years, this is definitely for you. The big problem with it: Large minimums and extremely small returns. If you want a decent interest rate, be prepared to deposit $5,000. Sometimes, it’s less than that. But then again, so is the interest rate.
If you look around, you will find things like a 1.35 percent interest rate for one year and a minimum deposit of $5,000. This would only get you a return of $68 when you get your money back. If you deposit $50,000 into that same account, your return is $675. So as you can see, unless you deposit half a million dollars to get a $6,750 return, this isn’t really worth it. Even if it’s a 5-year CD, $5,000 will only get you a return of $347. Then again, $500,000 gets you a return of $34,674 after five years. Something tells me that if you had that just laying around, you wouldn’t be reading my blog about investing your money wisely.
Individual Retirement Accounts (IRAs)
I’m going to say this right now: Saving for retirement is a great idea. Especially if you’ve got an extra $5,000 per year that you’re not going to need. If you’re 26 years old, like me, it would be wise to get a Roth IRA. Why? Because this one allows you to pay the taxes now. Traditional IRAs make you pay the taxes on the money in there when you withdraw it. That might be a bad idea since tax rates might increase by the time we’re old enough to take it out.
One thing that people don’t seem to understand about an IRA is that it’s a shell account and can be used in investments. You ever hear about people losing their retirement in the stock market? Much of the time, when people invest their retirement, it’s literally money from their IRA that’s being invested. If people put their IRA into a stock that booms, they can have a lot of money tucked away for when they’re older. This is what a lot of experienced investors do.
Can’t afford an ETF or stock? There are actually investment apps that allow you to purchase a sliver of one for, literally, pennies on the dollar. Acorns and Stash are two apps that I’ve heard of. Yahoo! Finance has an article about them. This is a very slow way of accumulating money through investments. But if there’s no way in heck that you’re going to be able to do anything else, this is a great way to go.
Don’t Have Money Saved Up?
It’s never too late to start! My wife and I used cash for most of our transactions and put the change in a jar for about six months and realized that we had around $150 in change sitting around. This isn’t typical store spending, of course. But you get the idea. If you’re in college or high school and have minimal expenses, work a lot and save it up. Donate plasma. Get a job at a temp agency. The possibilities are endless! The key to investing your chunk of money, big or small, is to get it in the first place.