You may wish you lived in a huge, luxurious house and had staff waiting on you, to serve your needs, but that is most likely not going to happen, right? What you might not realize, though, is that you could have an army of little workers toiling away for you and making you richer: I am talking about dollars.
While you sleep and even when you are on vacation, well-deployed dollars can be busy generating more dollars and beefing up your net worth. Here’s a look at 7 ways to invest. See which ones you want to act on.
Bank savings accounts
This first way to make your money work for you is arguably the easiest — though much of the time it will not be the most powerful: bank savings accounts. While checking accounts these days will not pay you much, if any, interest, savings accounts do pay interest, and when interest rates are steep, they can pay you a lot. In the 1980s, for example, interest rates were well into the teens. Today, though, the best savings account rates you are likely to find will be closer to 2%.
Bonds are another way to get your dollars to work for you earning interest. There is a wide variety of bonds, with different interest rates and risks. Long-term government bonds often offer better rates than bank accounts, and are backed by the U.S. government, making them pretty darn safe. Bonds sold by the U.S. government’s Treasury Department are called Treasuries. State and local governments issue municipal bonds, while businesses issue corporate bonds. (Municipal bond interest is often free of federal taxes.) “Junk bonds” are those issued by not-so-solid companies. Junk bonds feature generous interest rates because they must attract investors willing to bear their risk.
Here are some recent Treasury rates:
Note that investors do not necessarily buy a bond when it is first issued and then hold it to maturity, for several years or decades. Instead, bonds are often traded between investors, with their prices rising and falling in reaction to prevailing interest rates. When rates fall, people tend to bid up bond prices. After all, if banks are offering 2%, a 5% bond will be appealing. When interest rates rise, newer bonds with higher interest rates will be more appealing than older bonds with lower rates. If you hold a bond to maturity, you’ll generally experience little to no volatility, but if you’re dealing with bond mutual funds or are buying or selling bonds in the secondary market, know that their prices can rise and fall.
Bonds can be great at times when interest rates are high, and you may hold some even when rates are low, just for the diversification. But your money can usually be more productive for you when it is invested in stocks than when it is in bonds. Stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012 and in 99% of all 30-year holding periods, according to the research of Wharton Business School professor Jeremy Siegel.
A simple way to invest in stocks is through one or more low-fee, broad-market index funds. Each tracks an index, giving you its approximate return. The Vanguard 500 Index Fund, for example, tracks the S&P 500 index, which is made up of 500 of America’s biggest companies that together represent about 80% of the entire U.S. stock market’s value.
It is worth noting that many stocks (and broad-market index funds as well) pay dividends, which is another way your money can work for you. Dollars invested in dividend-paying stocks will generate regular payments to you. Here, for example, are some recent dividend yields of some well-known companies:
Your dollars can also be productive for you through real estate. If you buy a home with a mortgage, you will be building equity in the home over time — if the home’s value does not fall. If the home’s value appreciates, presto — even more value for you.
Real estate is not the sure thing that many people think it is, though. Yes, plenty of people do well with it, but overall, it is not as powerful a wealth builder as stocks. According to Yale economist and housing expert Robert Shiller’s extensive data — spanning 100 years from 1890 to 1990 — the value of American homes, adjusted for inflation, did not really rise much at all over the entire century. Home values have risen since 1990, but from 1890 to 2018, the inflation-adjusted value of homes merely doubled, roughly, and 128 years is a long time to wait for a doubling in value. It’s important to get the right loan for your investment, which makes choosing the right bank even more important. Take a look at Newcastle Permanent via this link for great options.
Over the past 20 years, home values have grown by about 4% annually, on average — but that’s pre-inflation. Inflation’s long-term average is about 3% per year, reducing that 4% annual gain to, on average, around 1%. That is just an average, too — many homes in various places in the U.S. have lost value over both short and long periods. It is best to think of the home you buy as a valuable property in which to live, not as your road to riches. (Think twice about making money as a landlord, too, as that can also offer meagre returns and a lot of headaches.)
Paying off your various debts is another way to make your money work for you, in an interesting way. Each dollar with which you pay down your principal saves you from having to pay interest on that sum — possibly for many years. Thus, paying down debt is delivering some guaranteed returns.
Imagine, for example, making $5,000 in extra payments against principal on your mortgage, when your loan’s interest rate is 5%. That is like earning a 5% return on that $5,000 — amounting to $250 year after year. It is even better when you pay off high-interest-rate debt, such as that for credit cards. Paying off a debt on which you are being charged 25% interest is like earning a 25% return — a return you would be hard-pressed to find elsewhere.
Another way to make your money work for you is to establish some passive (or relatively passive) income streams for yourself. Here are a few ideas:
Annuities: If you fork over a hefty sum to a good insurance company for an immediate fixed annuity, it will pay you a certain sum for the rest of your life. (The sum will depend on your age and interest rates, among other things.)
Residual and royalty income: You might take photos and have them available for a fee at sites such as shutterstock.com or istockphoto.com. Similarly, you can create and upload designs at sites such as zazzle.com and cafepress.com, where people can buy them imprinted on shirts, mugs, and so on. Similarly, if you write an e-book (which can be as short as 6,000 or so words), you might find that people are interested in buying it, perhaps through Amazon.com’s direct publishing service. You might also sell designs for wedding invitations on Etsy or elsewhere.
Rent out space: You could take in a full-time boarder, or just rent out an extra room with a service such as airbnb.com or homewaway.com. If you do so for just 20 nights a year and charge $100 per night, that is $2,000 in pre-tax income! If your home is in a desirable spot, maybe you can rent out the whole house for just two weeks in the summer, charging $2,000 per week and collecting $4,000.
Refinance your mortgage: If you are making monthly mortgage payments of $1,800 now and can reduce that to $1,500 per month by refinancing your home loan at a lower interest rate, you will keep $300 in your pocket each month. Take closing costs into account, though. If you plan to stay in your home long enough to more than break even, refinancing is well worth it.
Get a reverse mortgage: Reverse mortgages have some downsides, such as often removing your ability to leave your home to loved ones, but they’re perfect for some for retirees who really need income. A reverse mortgage is essentially a loan based on your home’s equity, with the amount borrowed not having to be repaid until you die, sell your home, or stop living in it (perhaps because you moved to a nursing home). At that time, the home can be sold to cover the debt — or your heirs can pay it off and keep the home.
Rewards credit cards
We have covered the dark side of credit cards — pernicious debt with steep interest rates. But there is a bright side, too. If you don’t use your credit cards to rack up debt, you can instead use some of the best credit cards to generate income for you, with their cash-back or rewards programs. Some cards offer flat-rate cash-back percentages up to about 2%. Others target certain kinds of spending or certain retailers. If you spend a lot at Amazon.com, for example, you can get a card that rewards you with 5% cash back there — which can really add up. Other stores with associated credit cards include Target, Costco, Gap, Lowe’s, TJX, and Wal-Mart. Many offer 3% to 5% in cash back or discounted prices, and many offer other perks, too, such as free shipping on items purchased at the sponsoring retailer, while others might let you return items without a receipt or will donate money to charity whenever you use the card. If you travel a lot, you can use travel-related credit cards to rack up lots of points and rewards that can be used instead of cash, keeping more cash in your pocket. Newcastle Permanent is one bank that offers great value related credit cards. Take a look here.