If you’ve got some cash lying around, there are so many options for your money, it might make your head spin. Carefully consider your needs and time horizon and we can help you make your money work for you.
What Kind of Investor are You?
Are you a passive income investor? Passive income strategies are ideal if you don’t have the time or inclination to be actively involved in the day-to-day management of your investment vehicle.
Are you an active investor? Active investing is the opposite and requires more of a hands-on approach to money management. This may mean that you are actively involved in the business operations in which you invested or you personally manage a piece of rental property.
Next, check your timeline. How long are you planning to invest these funds to meet your financial goals?
- Short-term investing involves liquidating funds in three to five years or less
- Medium-term investing is five to 10 years, and
- Long-term investing is anything longer than 10 years
You may be a short-term investor if you just sold your house and plan to move or buy another property in a short amount of time and need a stable, risk-averse environment for that money to grow. On the other hand, retirement investing is generally considered a long-term investment with an opportunity to take on more risk, ride out the market and see long-term returns overtake short-term downturns.
Method 1: Short-Term Money-Making
If you need your money in less than five years, you’ll likely want to maintain your principal and grow your money carefully though risk-averse means. Losing some of your nest egg is too risky if you need it quickly and don’t have time to make up any gains you might have lost.
Get a Certificate of Deposit (CD)
A very simple strategy to sock away money is to own a certificate of deposit which will net you around 2.7% to 3.7% returns over the course of the CD, depending on the bank you choose. Pay close attention because rates can vary between banks. You can choose long-term CDs of five years or short-term six-month CDs
The rate is often better for longer-term CDs, so shop around and see what is available to you. CDs are FDIC-insured, so there’s no risk of losing any of your principal investment. Of course, CDs are not liquid and you pay a penalty to withdraw the funds early, so be sure that you select the correct investment term to fit your goals.
Use an Online Savings Account
Another safe short-term space to park your money is in a liquid online high-yield savings account, most of which will net you around a 2% return on your money. Choose a bank that is reputable and FDIC-insured so your principal is guaranteed, and also check to make sure you aren’t assessed monthly maintenance fees, transfer fees or require a minimum balance.
The FDIC may ensure your money, but bank fees can still eat a chunk out of your money if you aren’t careful. Once you get set up, you can make some modest gains and trust that your money will grow without having to lift a finger. Since your money is liquid, you can use it whenever you need it.
Open a Roth IRA
You deposit funds into a Roth Individual Retirement Account (IRA) after you have paid employment taxes. They’ll grow tax-free in the account. Depending on the types of funds you choose, it’s possible to see returns of 4% to 10%. Getting a 10% return may require you to make a more risky investment, so gauge your risk aversion carefully.
You can access the funds deposited in your Roth IRA penalty-free even before you reach retirement age, but you can’t access the growth in the account without a penalty. Any gains are yours to keep for retirement. Look for low- or no-fee accounts that won’t eat into your money. There is a risk that even with a conservative investing strategy, you can lose some of your principal, but the return potential is fairly high.
Here are some of Benzinga’s picks from our 2019 Best Roth IRAs:
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Method 2: Think in the Medium-Term
In the medium term, you may have a kid who will be in college in seven years or maybe you plan to retire in eight years. Perhaps you have a more nebulous timeline and want to plan a dream European vacation or start a new business. Ultimately, you don’t have a specific timeline other than a point between “someday” and retirement.
You can afford to take on some more risk for higher potential gains with a longer timeline since you’ll have more years to make up any losses. Really, your needs determine the amount of risk you’ll take.
Buy Intermediate Bond Funds
If you’re looking for a less-risky, passive medium-term investment, an intermediate-term bond index fund is a good choice. Like stock funds, short-term bond funds invest in an index of Treasury and corporate bonds. The bonds pay a steady rate of return around 3% to 5% and mature after three to six years, which makes them a good choice for a medium-term investor looking for a low-risk, steady growth investment.
You can lose some gains if the fund loses value, but having those extra years invested can help balance out a loss. The additional safety of investing in Treasury bonds is that they are backed by the Federal government and whatever amount you put into them, you’ll be guaranteed that principal amount upon maturity. Since these bond funds have a set maturity date, they are not liquid and you pay a penalty to withdraw early.
Invest in Rental Real Estate
If you’re looking for a hands-on project and are willing to take on more risk, purchasing and managing rental real estate can be a lucrative way to grow your money. If you have enough funds to purchase a rental property in a sought-after part of town, you can set yourself up for a steady stream of monthly income in exchange for some paperwork renter management.
The real estate market can be volatile and there is always the chance that your property value will diminish, but if you time it right, you’ll likely realize gains over your initial investment. Rental real estate is illiquid due to contracts with renters and it can take some time to sell a property.
Consider Balanced Mutual Funds
Balanced mutual funds invest in several asset types (usually both stocks and bonds) which balance the risk and security of the two and can result in projected steady growth. These funds average around 5% to 8% returns, though some funds have average returns as high as 12%.
There is always a risk that your money could decrease and eat into your initial investment, but the potential rewards are substantial. Fund shares can easily be sold to convert into cash when
Method 3: Long-Term Investments
If you’re saving for retirement, your children’s college education, or another faraway goal, you’ve got time on your hands. That means you might be able to take on more risk and less liquidity with your investments. Read on for more long-term investing ideas.
Open an Individual Retirement Account
If the long-term investing goal for your nest egg is for you to use the money in retirement, investing in an individual retirement account (IRA) is a good choice.
The tax shelter of an IRA makes these accounts a popular choice to put your money to work and watch it grow. There is a maximum annual deposit of $5,500 for an IRA so it’s not a good choice for a hefty nest egg, but you can spread funds out over a few annual deposits or use the IRA as only one of a number of investments you select for your money. Unlike a Roth IRA, your contributions to a traditional IRA cannot be withdrawn prior to age 59 ½ without penalty, which makes the account illiquid until you reach retirement age.
Get into Business
If you’ve been toying around with the idea of becoming an entrepreneur or owning part of a business, thinking long-term may help you pull the trigger and get moving toward your business venture. Investing for the long term in a business, whether you’re actively running the business or passively owning a percentage of the business and profit sharing, you take on great risk but also great potential rewards.
Choose carefully with whom or what you invest in, and be sure to evaluate whether the investment makes good business sense. A business is not a liquid investment, and your money will be tied up for a long time in inventory and overhead costs, making it difficult to get your investment back without liquidating the business or being bought out by other shareholders.
Making your money work for you is the key to financial stability and success. You’re limited by the number of hours you can physically work in a week, but there is no cap on your money’s future growth. Determine your time horizon, risk level and get going on your money’s future.