Savings accounts used to be a pretty good place to stash your money; a few decades ago, it was not unusual to see double-digit interest rates offered on simple savings accounts. These days, your bank’s “high-yield” savings account isn’t even likely to hit 1%. While there’s nothing you can do about the Federal Reserve setting its funds rate at historically low levels, you do still have some choices that can offer you higher return on your money.
Online savings accounts
The closest alternative to opening a savings account at your neighborhood bank is to open one online. Online banks can do business with only a fraction of the overhead that brick-and-mortar financial institutions incur, and they pass some of those savings on to their customers in the form of higher interest rates. If you need your savings to be accessible, an online savings account will allow you to withdraw money from it up to six times each month, while offering slightly better rates than your local bank.
Certificates of deposit, or CDs, are the next step up in terms of available interest. They are basically a type of savings account which you open with a single minimum deposit and then agree to leave untouched for a set period of time. The longer you’re willing to let the bank keep your money, the higher the interest rate you’ll receive. These days, the best rates available for 5-year CDs are 2.15%. Six- and 12-month CDs don’t offer much better rates than savings accounts, however, so you may not consider it worthwhile to keep your money out of reach. There is a cluster of equally safe, equally low-return investments such as money market mutual funds and Treasury bills, which you can talk with your banker about, but in general they all produce approximately the same level of return. If you are interested in CDs, Everbank is an online bank with great rates for CDs.
If you’re in a position to absorb a bit of risk, you can benefit from a far higher rate of return by putting your money into some online investments. These can take a variety of forms, and reputable online brokerages like OptionsHouse, TD Ameritrade and OptionsXpress by Charles Schwab provide a diverse set of portfolio options for the novice investor. Needless to say, the world of buying and selling financial products is enormously complex, but these days it’s possible to do a bit of experimenting with a modest sum of money. While potential returns are tied to risk levels, it’s important to remember that (unlike CDs and savings accounts) your money is not guaranteed to be safe when you engage in this type of investing.
Peer-to-peer lending is when everyday people invest in loans to other everyday people. How does it work? If you are looking to invest, you go to a peer-to-peer lending site and sign up. They will do a background check on you and your finances and either approve or reject you. If you are approved, you can invest your money in a fund that will then be lent out to people who apply for loans with the site. And you get to choose which loans you want to invest in, which is the best part of the sites. So instead of applying for a loan from a bank, they apply through this site and your money funds their loan. This also means that you get a large portion of the interest that those clients are charged. It’s straightforward and simple, which makes it a more attractive way to invest.
Real estate investing
You can enter the world of real estate investing at various levels. If you’re familiar with the real estate market in a particular area, and you have sufficient resources to purchase a property, you can enjoy significant income without having to become an authority in the complex realm of global online investing. Simply buying some property and renting or holding onto it for a time, and then selling it, can be a side investment or a professional career. This mortgage calculator can help you determine if you are ready to take on a new real estate investment.
To enter the real estate market with less money and lower risk, you can buy shares in a Real Estate Investment Trust (REIT). This is a type of investment vehicle in which many shareholders invest together in a number of commercial or residential real estate holdings, and these investments can take a wide variety of forms. One big advantage of REITs is that they are a liquid way to invest in real estate; you can benefit from the appreciation of property values, while being able to sell your shares anytime you choose.
The right savings method for you is partly dependent on whether you have the time and desire to learn about particular types of investments. Whether you prefer the safety and simplicity of a safe, low-return account or the demands and excitement of higher-risk investments, there are savings options available that will exactly suit your needs.