Published in: Banks | Aug. 5, 2019
By: Lyle Daly
To create wealth, you need to know how to grow your money.
Once you have some extra cash saved up, the next question that comes to mind is what you can do with it. You may have heard that it's smart to find ways to grow your money, but how exactly can you do that?
The good news is that there are many different financial products and opportunities available that can boost your savings. To help you decide where to put your money, I'm going to cover several potential options that you could choose, depending on your tolerance for risk and how soon you'll need access to the money.
If you may need to withdraw money at any moment, then a high-yield savings account (HYSA) is a smart place to keep it. You just open an account, deposit your money, and you're done.
These offer a higher interest rate than you'd earn with most other bank accounts, and you can still make withdrawals at any time without penalties. You never need to worry about losing money with a HYSA. You'll always earn interest on your balance, although the interest rate could go up or down depending on the market.
While HYSAs are secure, they're also the most conservative option. Your earning potential by keeping your money in this type of account is lower than with any other option on this list.
When you open a certificate of deposit (CD), you have to deposit your money and keep it in the account for a predetermined period of time. The best CDs earn more interest than you'd get with a savings account. They also have fixed interest rates, so your interest rate can't go down after you open the account.
Banks generally offer CDs for between one and five years, and interest rates tend to go up with the term length. If you withdraw your money before the term is up, then you'll need to pay a penalty. This penalty is often equal to a portion of the interest you've earned. While there are no-penalty CDs that let you withdraw your funds at any time, they won't earn you as much interest.
Like savings accounts, CDs ensure that your money grows. If you're looking for a secure option and you're confident you won't need the money until the end of the term, then a CD is worth considering.
Investing is what you should do if you want to play the long game and build wealth 10, 20, and 30 years down the road. The reason investing works so well for this is because it's a relatively safe way to grow your money, and you can potentially get a much greater return than you would through a bank account or CD.
The stock market has averaged an annual return of 9% to 10% for decades, so if you invest money regularly, you can earn a significant amount. For a beginner, the best way to get started is to invest in an index fund, mutual fund, or exchange-traded fund (ETF). These funds all track many different assets, so they tend to be safer than picking stocks on your own.
There are a couple things to know about investing. It's riskier than putting your money in a bank account or CD, because your investments could lose value. If you invest wisely, you should make money long-term, but the market can be volatile from year to year.
For that reason, you shouldn't invest money that you may need within the next five to 10 years. If the market dips before you need to sell your investments, you could end up losing money.
Peer-to-peer (P2P) loans are loans funded by other consumers. Here's how they work:
Most loan requests are funded by many different lenders. Let's say that a borrower requests $1,000. The platform may use $25 from 40 separate lenders to fund the loan.
One nice thing about P2P lending is that you have quite a bit of control over your risk and reward. You can choose to fund loans from only the safest borrowers and make less interest, or you can fund loans from higher-risk borrowers that need to pay more interest.
Since personal loans usually have terms of one year or longer, your money will be tied up for the length of the loan. And of course, if a borrower defaults, there goes the money you loaned them. For that reason, it's better to err on the side of caution with the loans that you fund.
If you have a business idea that you want to pursue, the money you've saved could be your ticket to getting started.
This is the option that presents the most risk, as there's the possibility that you could spend all your money and have nothing to show for it. On the other hand, there's no limit to how much you could earn if your business takes off.
Starting a business is a big decision, so it shouldn't be something you choose to get rich quick. The other options on this list are all much safer ways to use your savings. But if you've done your homework and you feel like you could create a successful business, then it's worth a shot.
With the right strategy, you can start using the money you've saved to earn more. All the options listed above can work, so it just depends on picking the one that best matches your goals and your current financial situation.
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