When you ask for financial advice, people will often say “make your money work for you.” But how do you do it? Well, the answer isn’t simple, and there is no one-size-fits-all solution.
Welcome to the 2nd FLA Guest Blog Post! Today, we explore how to make money work for you. Thank you to Michael from Finance-Able for sharing this helpful comprehensive guide.
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Once you make money, it is tempting to let it sit in a savings account as you try to earn more. But by investing your money, you can make it work for you and grow over time. Investing is central to a comprehensive money management strategy.
To make the most of your money, here are a few approaches to try.
1. Open a High-Yielding Savings Account
Many financial experts are of the opinion that before you send off your money to do the heavy lifting, you need to have an emergency savings account that will cover at least six months of living expenses.
One of the best places to store your cash is an FDIC-insured, high-yielding savings or checking account as it can generate maximum value.
A typical savings account provides an interest of about 0.01%, while putting money in a checking account is equivalent to placing money under the mattress. However, high-yield savings and checking provide interest rates that are more than 1%, which is about 1% more than what you usually get.
2. Purchase Assets that Aren’t Affected by Inflation
Inflation is when the cost of products or services rises but paychecks don’t keep up. An increasing inflation rate can paralyze a nation’s currency value and buying potential.
In fact, inflation can reduce the wealth that you create. For instance, the present inflation rate in the United States is 2.26%. So, if you invest in a fixed deposit (FD) that offers a 3-4% return, that is not going to work.
This investment will erode your wealth. It will work against you. This is the reason investors invest in market-linked assets, such as mutual funds and stocks. These assets can outpace inflation. Top-quality stocks generate average returns between 9% and 12%. With mutual funds, you can get a return of 6% to 15%.
Buying assets is an effective way to make money and beat inflation. There are apps that provide access to top-quality mutual funds and stocks.
3. Create a Stream of Passive Income
Passive income means the money earned with little or no effort. When you have set it up, passive income will earn you money while you sleep. This can lead to financial independence, but having passive income streams is not a get-rich-quick method.
To create a stream of passive income, you must invest upfront — whether that investment is money or time. But it will lead to large payoffs later on.
A few forms of passive income include silent business partnerships and real estate investment. However, you can also generate money through other methods, such as making YouTube videos, or starting a blog and earning via affiliate marketing.
4. Create a Retirement Fund
Many people don’t enjoy the luxury of a pension. So, you should store your money in a retirement account. Individual retirement accounts (IRAs) and 401ks are investment accounts. This means your retirement savings are an investment in the market and can grow exponentially.
The primary idea is to leverage the money you have to make more money. As you save as much as you can, your money will work for you tax-efficiently to grow more money.
In addition to IRAs, another great option is health savings accounts (HSAs). These are savings accounts with high-deductible health insurance coverage.
When you sock money away in an HSA, you won’t lose it. If you need the money for healthcare, you can withdraw your money without paying any taxes. As you turn 65, the money in the account will transform into an IRA.
So, you don’t get penalized for using the fund for other purposes. Using the fund, you can pay long-term care premiums and Medicare costs.
5. Use Target-Date Funds
Lifecycle funds, or target-date funds, are structured to grow in assets and rebalance continuously over time to optimize your savings.
It’s safer to invest in target-date funds as it helps in managing investment risk. With target-date funds, it is also possible to structure your retirement fund when you don’t want to delve deep into setting up your portfolio.
A target-date fund is based on the fund you set up for return and your age. The funds are more diversified when you are younger. This increases your risk and increases the fund’s value. So, as you age, target-funds will readjust to become more conservative.
With a target-date fund, you can set the approximate age or year you plan to retire. Presently, many target-funds have been set up for a return in 2050. It is offered through many money lenders and banks.
The process comes with some drawbacks, but one of its primary benefits is simplicity. If you want, you can make your initial investment and forget all about it until you retire. This can be preferable to bonds, stocks, and other retirement portfolios, as it is a painless method to invest in your retirement. However, you should know which stocks to buy and when it’s the right time to invest in the stock market.
6. Choose Credit Cards with Rewards
When you use a credit card, it might feel like you aren’t putting your money to work. However, choosing a card that comes with a reward can be good for your lifestyle. For instance, airline miles can be good for people who are interested in traveling.
If you have steady cash flow and pay your bills on time, you can find great credit cards. However, if you are in credit card debt, this strategy might not be useful for you.
7. Invest in Gold and Bonds
When it comes to a conventional investment strategy, many tend to look toward gold. Like real estate, it is an asset that might appreciate steadily with time. You can buy gold and hold it in your hand. This can be an appealing option for people who prefer tangible assets.
As you consider investing, be sure to take your overall portfolio into account instead of just one investment. However, in such cases, gold can serve as a stunning piece of your financial plan. But don’t invest all your money in gold. It should only be a part of your investment strategy.
Another option is to invest in bonds, where you provide a loan to an organization that consents to pay back the debt on a certain schedule. Bonds are sold by businesses and government agencies. Usually, bonds pay off twice a year. Hence, you have a predictable income source if you invest in a bond until it matures.
Bonds are predictable and this makes them attractive in an investment portfolio. If you decide to spend on volatile investments that come with some degree of risk, bonds are a good way to offset such risk.
Your gains from the bond will not increase to the level of the riskier ventures. But they are a good foundation for your investment strategy. However, before you invest in bonds, make sure you thoroughly understand the difference between stocks and bonds.
8. Become a Silent Partner in a New Business
It can be a risky move to start your own business. However, if things progress well, it is likely to pay off.
A good way to reap the benefits of a startup without the stress of getting the business off the ground is to be a silent partner who invests capital but doesn’t take care of day-to-day operations. This method allows you to earn a cut of the profits without investing long hours.
However, if you use this strategy remember that you won’t be involved in the daily decision-making process. So you may not have as much control over your investment as you would like. And if the business tanks, you will have to bear the financial loss.
9. Eliminate Debt
The idea of making money work for you is that every dollar, penny, and dime you invest or save multiplies exponentially. However, if you have debt, the exact opposite is going to happen.
Basically, each dollar you owe will cost you more in the long run. Like many, you may think that spending large sums of money now will benefit you over time, even if it means going deeper in debt. But this can cause you to stay in debt longer, and the longer you are in debt, the more money it is going to cost you to get out.
Sadly, banks and credit card companies don’t exist to help you. The money you lose every month funds their organizations. Rather than working for you, your money is working for them.
Today, people are in different kinds of debt. With time, many have accepted debt as part of their life. But this is a mindset you should get rid of. You should not accept debt as part of your life.
Here are some ways to streamline your path to a debt-free life.
- Find out exactly how much you owe. It is crucial that you own your debt. Only when you know the amount you owe and to whom, along with the interest rates, will you be able to pay them off effectively.
- Develop a strategy. This takes into account the amount you owe to every company along with their interest rate. The higher the interest rate, the faster you should pay it off. Use loan tracking software to learn how much you have to pay monthly to clear your debt, including student loans. Make sure you are honest with yourself. It is difficult to eliminate your debt, but it isn’t impossible.
10. Invest in Real Estate
Real estate is not a guaranteed investment. But if you have the cash and risk tolerance, consider investing in commercial or residential properties.
There are two types of real estate investment.
- Buying a single home.
- Investing in land to sell or in homes or stores to rent.
Your decision to branch out will depend on the market and your desire to own rental properties. In most cases, if you can take on the added responsibility of upkeep and management, investing in real estate is a great option.
Many homeowners take real estate to be the biggest asset in their investment portfolio. However, make sure that you don’t weigh your portfolio too heavily toward a single asset.
11. Invest in Cryptocurrencies
Cryptocurrencies can also be part of your investment portfolio. However, it is a speculative holding. The value of cryptocurrency is increasing exponentially, but investing in crypto comes with high risk. If the market crashes, you lose your investment.
Cryptocurrencies like Bitcoin trade with swings of at least 2% routinely throughout the day. But people think that as cryptocurrencies are adopted by more and more people, they will continue to increase in value. Take that into consideration before you decide to invest in it.
What Is the Best Way to Make Your Money Work for You?
The power of investing money is incredible. However, you are not going to get anywhere until you get started. With every passing day, you are missing out on opportunities to grow your money.
No matter the type of investment you make, seeing results will take time. Hence, we recommend getting started as soon as you can to make your money work for you.
We have provided a list of investment strategies, but you should only go for the ones that work for you. Identify your risk profile and long-term goals. Decide on a plan where you will not have to take more risk than you’re comfortable with.
Remember, investing is about carefully following strategies to a robust financial future.
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Disclosure: Fresh Life Advice is an opinion-based website. I am not a financial advisor, and the opinions on this site should not be considered financial advice.
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How do you make your money work for you? Let me know in the comments below.