10 Ways to Make Your Money Work for You

You may wish you lived in a huge, luxurious house and had staff waiting on you, to serve your needs, but that's 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'm talking about dollars.

While you sleep and even when you're on vacation, well-deployed dollars can be busy generating more dollars and beefing up your net worth. Here's a look at 10 ways to invest. See which ones you want to act on.

Image source: Getty Images.

No. 1. Bank savings accounts

This first way to make your money work for you is arguably the easiest -- though much of the time it won't be the most powerful: bank savings accounts. While checking accounts these days won't 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're likely to find will be closer to 2%.

No. 2. Certificates of deposit (CDs) and money market accounts

To get better rates of return than you from bank savings accounts, you can park your greenbacks in certificates of deposit (CDs) or money market accounts, which tend to offer somewhat better rates. The catch is simply that you're supposed to leave your CD money invested for the full term, or pay an early withdrawal penalty. Here are some recent representative CD rates:

Data source: author research. 

Money market accounts were recently offering interest rates between about 2% and 2.2%.

No. 3. Bonds

Bonds are another way to get your dollars to work for you earning interest. There's 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 have to in order to attract investors willing to bear their risk.

Here are some recent Treasury rates:

Data source: Bloomberg.com. 

Note that investors don't necessarily buy a bond when it's 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.

Image source: Getty Images.

No. 4. Stocks

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's invested in stocks than when it's 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. Siegel has calculated the average returns for stocks and bonds and treasury bills between 1926 and 2012:

Data source: Stocks for the Long Run by Jeremy Siegel.

Stocks are one of the best ways to build your wealth. The following table shows just how much your money might grow in them, as opposed to in other kinds of investments. Remember that bank accounts will tend to offer relatively low returns, topped by bonds, which are generally outpaced by stocks. To very roughly approximate their returns, this table shows how money grows at 2% (for bank accounts these days), 5% (for bonds), and 8% (for stocks):

Data source: calculations by author.

A simple way to invest in stocks is through one or more low-fee, broad-market index funds. Each tracks a particular 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's 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:

Data source: Yahoo! Finance.

No. 5. Real estate

Your dollars can also be productive for you through real estate. If you buy a home with a mortgage, you'll be building equity in the home over time -- as long as the home's value doesn't fall. If the home's value appreciates, presto -- even more value for you.

Real estate isn't the sure thing that many people think it is, though. Yes, plenty of people do well with it, but overall it's 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, didn't 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.

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's just an average, too -- many homes in various places in the U.S. have actually lost value over both short and long periods. It's 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 meager returns and a lot of headaches.)

No. 6. Gold

Many people think of gold as a great investments, and some people have made good money with gold, but over the long run, it's not a great wealth-building strategy. Gold is volatile, too. Check out some sample prices per ounce:

Data source: onlygold.com. 
*Nov. 16, 2018.

Yes, gold has clearly appreciated significantly, from 20 years ago to today, but a little number crunching shows that an increase from $870 to $1,222 over almost 20 years is the result of a 1.7% average annual growth rate.

Image source: Getty Images.

No. 7. Debt repayments

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's like earning a 5% return on that $5,000 -- amounting to $250 year after year. It's even better when you pay off high-interest-rate debt, such as that for credit cards. Paying off a debt on which you're being charged 25% interest is like earning a 25% return -- a return you'd be hard-pressed to find elsewhere.

No. 8. Passive income

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's $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're 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'll 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.

No. 9. Rewards credit cards

We've covered the dark side of credit cards -- pernicious debt with steep interest rates. But there's 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.

No. 10. Strategic charitable donations

Finally, you can put your dollars to productive use for the benefit of others -- by making charitable contributions of cash, stocks, or goods. In fact, there's also a potential financial benefit for you, too, in the form of a tax deduction.

There are lots of ways that you can have your money working to build your wealth. Consider the 10 ways we've discussed here and see how many of them you might employ and how much you might amass. Hundreds or thousands of dollars may be headed your way thanks to these strategies.