Been to a bank lately? If you’re a saver, there’s not much for you to smile about.
It’s frustrating, isn’t it? You work hard to save money, and then there’s nothing to do with it. While interest rates have been supposedly on a rising path, a quick look at comparison sites shows that there’s not much out there paying more than one percent.
Let’s look at some potential ways to earn better rates on your money and examine the pros and cons of the various options, so you can approach your choices with a critical eye.
What worries me: you aren’t beating inflation. I’ve heard arguments that inflation may be nonexistent but look at how much you’re spending on your craft…supplies…classes… Have those prices risen? I’ll bet they have.
Why I like it: Currently, money markets pay between a tenth of a percent and just over one percent. That’s certainly better than a savings account!
Certificates of Deposit:
What worries me: Will you actually make more money with a CD than in another option? Many CDs pay less than money markets AND you’ll have to lock your money away. No, thank you.
Why I like it: If you can find a CD that outpaces the best money markets out there, and you’re able to wait until the due date on the CD, take it. You’ll have a higher return and the safety of FDIC insurance.
Bonds (Individual bonds or funds):
What worries me: In a recent blog post we talked about interest rates being on the way up. When interest rates rise, bond prices drop. Bonds are also horrible investments if you’re focusing on short-term results.
Why I like it: Bonds fluctuate in value, but when you loan people money, it’s generally safer than buying stock in their company. Bonds come with a fixed interest rate that you can monitor. You can also decide between short term and long term bonds (more risky), depending on how much time you have until you need the money.
The Stock Market (index funds):
What Worries Me: The stock market is volatile. Every day on money-related channels some talking head is saying either the word “soar” or “plummet” when describing stocks. Imagine if you stepped on an elevator and those were your only two choices. Ouch.
My fear about the stock market is actually less about the market, though, and more about you. Many people have difficulty confidently picking a fund and then sticking with their plan. If you’re the type of person who wants short-term results, the stock market isn’t for you.
Why I like it: There are only a couple of paths to reliable inflation-beating returns, and the stock market is one of them. If you’re looking long-term, using an index fund (such as the S&P 500) has been an attractive way to gain better returns than savings accounts.
What worries me: Real estate is illiquid. If you’ve invested in real estate and need money, it’ll take you a while to sell. You can’t peel off part of the garage to access a few dollars immediately. Plus, remember 2008? Real estate can go through ugly periods, just like stocks. Some people still haven’t recovered from the 2008 real estate mess.
Why I Like It: Like stocks, rental real estate has been the most consistent inflation-beater over long periods of time (10 years or more, with the notable exception of the last eight years…which probably won’t bring us in some markets back to pre-2008 levels). While some people prefer to purchase their own properties, you should work with a professional if you’re going to go this route. For many investors who have no interest in buying individual properties, you can also purchase something called a real estate investment trust, which is an investment in real estate that trades like a stock and owns a collection of diversified properties.
What worries me: Annuities have LOTS of provisions and some have very high fees. Don’t take an annuity salesperson’s word for the product…annuities come with a contract. Read it thoroughly so you know what you’re getting into. There’s also no FDIC insurance, so you’re relying on the financial savvy of the insurance company, and that they’ll still be in business when you need your money.
Why I Like It: Some fixed annuities pay a much better rate than CDs but have similar terms. If you can find a reliable company with a guaranteed, fixed rate that is significantly higher than a CD, you may want to consider it.
My Final Thought:
These are a few of the most popular ways people try to beat the low-interest rate in their savings account. The right choice for you depends on a few factors:
- When do you need the money? If you need it in the next few months, finding a money market may be your best option. A year? Check out CDs. Longer? Look for investment types that have produced consistent returns during that period of time.
- What is the down-side? You should know going in what your risks might be with an investment. Much like you would with your craft, weigh the upsides and downsides before starting to work, and you’ll be much better off.
- Would I feel worse if I lost money taking too much risk or if I missed out on returns being too conservative? A large part of financial planning is wrapped up in knowing yourself. As artists, we’re often more comfortable exploring emotions and situations. By utilizing this skill when it comes to your finances, you’re more likely to make the best decision…and have your money available when you need it.