The memo has been going around for awhile: savings bank accounts may be secure, but they’re not infallible and in terms of returns, are one of the lowest-paying options available. These days there are a number of other options for earning interest on your savings. Some are higher risk than traditional savings accounts, while some are lower. Most of them offer better rates of return.
Looking at different ways to invest your savings requires a lot of research. The first step is to increase your financial literacy. Get familiar with some of the terms used in the investment industry.
Bank Accounts
Generally, putting your savings into bank accounts is a safe and easy option. Your money is insured, and access to it is more flexible than investments with terms.
The problem is that even high-interest savings accounts generally only offer 1 to 1.25 percent interest rates. When you consider that the U.S inflation rate is currently at 1.7 percent, a problem emerges: Your investments aren’t keeping up with the tides of the economy.
Retirement Accounts
Retirement accounts such as employer-sponsored 401(k)s tend to be among the safer investment strategies. The money you put in is handled by financial service professionals and put into a variety of stocks and bonds to keep them stable.
While they’re low risk, retirement accounts do have limits. Generally they are earmarked for their namesake: retirement. They aren’t meant for short-term investments, so when and how you can claim your money is controlled. There are also limits on how much you can put into a 401(k) in a single year. This number is rather ridiculously high, and unlikely a concern for those of us who don’t make six figures. But it’s there.
Government-Backed Investments
There are a number of investment types that are backed by the U.S government, which make them among the safest investments out there.
I-Bonds for example, are protected against inflation. And investing in currency through the U.S treasury is considered to be the safest method in the world.
These types of investments are usually fixed terms. If you end up needing money before the investment is “matured,” you could be out of luck.
Stocks and Bonds
You can undertake investments in both stocks and/or bonds yourself, or make use of the services of a financial advisor to help you. These are the same types of investments made on your behalf in a 401(k) account, but doing it yourself can be a complex process.
The right mix of stocks and bonds with carefully considered amounts of risk and volatility can safely grow your nest egg. The main problem with this investment strategy is that it tends not to be a “fire and forget” type of process. You need to pay attention to the performance of your investments, especially if you decide to place money into the stock market. Stocks can be highly volatile, but offer high potential returns.
A bond is in effect a loan that you give to a company or a government, so they tend to have set rates of interest. They’re considered safer than stocks, but if you’re investing in a company, there’s always the risk they will go belly-up.
Stocks, on the other hand, are probably the most talked about type of investment. The stock market trades in stocks of companies. They don’t collect interest; instead they appreciate or depreciate in value. That’s what makes them volatile. They react to forces outside of the wider economy, such as the unexpected firing of a CEO, legal battles, the performance of a new product … The list is practically endless.
Futures Trading
Futures are perhaps the most mind-boggling form of investment. They also require the greatest care and a trained ability to look at historical information in order make predictions about the future.
In a nutshell, a future is a contract where two parties agree on the price of a commodity (gold, wheat, cattle, etc) at a future date. When that date rolls around, if the price of the commodity has gone up, the buyer gains money. If it has gone down, the seller gains money. The exchange upon which futures are traded is federally regulated, but it can be highly volatile. Every contract has a set quantity and quality, which means that the only variable is ever price.
The danger with futures trading is due to several factors, including the limited term of a contract. One of the biggest influences on the earning potential and risk of futures is the fact that you don’t have to purchase the whole contract. You only need to put a small percentage down to secure a contract, but the results are calculated as if you had put down 100 percent. That means that compared to what you put down, you can make a very high percentage of profit. But it also means that a bad trade can lose you more money than you originally put down and require you pay back the difference.
It’s a good idea to seek advice before you decide on an investment strategy. Staying too safe and keeping you money in a savings account could see you left behind by inflation. Too much risk and you might lose a lot of money. The right balance is hard to find, so do your research, and happy investing!
