Make Your Money Work For You: How to Earn Interest Income
If there’s one thing that rich people usually know how to do well, it’s grow their wealth. One of the most reliable ways to do this is to let funds and assets grow by collecting interest on them. However, this option isn’t just available to the wealthy!
If you have any amount of money that you can afford to set aside in an account for savings purposes, then you are in a position to grow your wealth. All you have to do is not touch it for a while. This isn’t a get rich quick scheme — in fact, it’s quite the opposite. By letting your money collect interest, you can set yourself up to reliably grow your wealth over a long period of time, with minimal risk.
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Ways to Make Your Money Work For You
You can make your money work for you by setting it aside in an account or investment that will collect interest over time. In this case, interest is a payment made to you by whoever is holding your money or investments at an agreed upon rate, usually expressed as a percentage of the total balance of savings of investments that you have.
So, for example, if you put $10,000 into a savings account of some form and the interest rate on that savings account is 2 percent per year, then you could be paid $200 at the end of the first year just for holding your account.
That’s not enough money to make you rich instantly, but it is an extremely reliable amount that will only continue to grow with time. If you had $100,000 in that same account, you could stand to grow your wealth by $2,000 without lifting a finger. Interest rates and other gradual rates of return work the best for people who are patient enough to wait and frugal enough to set aside a large sum of money in order to watch it grow. There are several different types of accounts and investments that can help you grow your wealth.
High-Yield Savings and Checking Accounts
High-yield savings accounts are a form of savings account that pay out at relatively high interest rates and with relatively low fees attached to them. In order to offset these low fees and high interest rates, high-yield savings accounts, such as a CD account, often come with requirements about how much money must be deposited, how much money must remain in the account for as long as it is open, and when account holders are allowed to withdraw these funds. In exchange for accepting these requirements, a patient saver can grow their wealth at a higher rate than an average savings account or checking account would allow.
A high-yield savings account can be started with almost any major bank. If you do decide to shop around for high-yield savings accounts, be aware that the Truth in Savings Act requires banks to be transparent about the terms and conditions of the accounts that they offer, including the interest rate for an account and any fees associated with it.
Who Should Use a High-Yield Savings Account
High-yield savings accounts are ideal if you feel confident putting away a large sum of money and leaving it outside your grasp for at least a few years while it accrues interest. This means that high-yield savings accounts are best for situations where you are planning for a known expense in the more distant future, and you’d like to save up for that expense starting now. These situations might include saving for a new car, saving for college, or saving to make the down payment on a home.
While high-yield savings accounts are offered by many major banks, these aren’t only financial institutions that you should be aware of if you’re interested in growing your wealth. Credit unions are similar to banks insofar as they offer deposit accounts. However, credit unions only offer accounts to members, and they often have strict guidelines about who can become a member.
The trade-off of having these membership requirements is that credit unions can offer higher interest rates and lower fees within their community, compared to the large banks that they compete with. This means that you may be able to get a better deal on your savings account at a credit union than at a bank.
Who Should Use a Credit Union
A savings account at a credit union is best for anyone who can become a member of a credit union that offers better terms than any bank that’s available to you. If you meet a credit union’s membership requirements — whether they have to do with location, place of work, or even having a veteran in your family — then it’s worth comparing the savings account that your credit union offers with your other options.
Bonds are sold by the Department of the Treasury and they come with fairly high interest rates compared to savings accounts. The trade-off is that bonds have very long maturation periods, so it will be quite a while before a bond reaches its full value. In April of 2019, we found that 30 year bonds carried an interest rate of 3 percent. If you own bonds, you can either sell them before maturity for the initial value plus however much they have accrued in interest or you can wait until they mature. If you wait until they mature, you will receive the yield to maturity (YTM) on that bond, which is an agreed-upon value that is set when the bond is first sold.
Who Should Use Bonds
Since bonds have such a long maturation period, they are ideal for people who can afford to wait. They make a great gift for young children, who will be unable to use the bond’s value anyway until many years after its purchase.
Playing the stock market is often seen as a way to get rich quick. However, for most people, the stock market is much better suited as a way to slowly and reliably grow wealth over a long period of time. Instead of putting your money into a savings account or buying bonds, you can choose to invest in stocks. If you choose the right stocks, you can watch as their value goes up over time and eventually sell them at a much higher value than you originally purchased them for.
Investing in the stock market over the long term usually carries with it high rates of return. The 30 year rate of return of the S&P 500 — a powerful group of stocks that is thought to represent overall trends in the market — since 1926 has bounced between 8 and 15 percent per year. It’s easier to get closer to this rate by investing in mutual funds rather than individual stocks, which can change in value in more unpredictable ways.
Who Should Use Stocks
Stocks are an ideal form of investment for people who can afford to wait and can be flexible in when they withdraw your money. If you invest in the stock market, you can expect a good rate of return in the long term. However, in order to reach that good rate of return, you may need to weather several years of bad economic conditions, when your stock investments will not be worth as much.
So stocks are best for people who have a sizeable portion of money that they can set aside for investment purposes while maintaining the kind of financial freedom necessary to remain flexible about when those stocks are sold.
401k and Roth IRA
401k plans and Roth IRAs are both types of accounts that can help you save for retirement. They have strict rules about how much money can be put into them and what happens to money that is taken out before retirement, but for those who can set their money aside for the long-term, they can help to secure financial health in retirement.
Retirement savings accounts are often employer-sponsored, meaning that they are funded by a mixture of your contributions along with matching contributions from your employer. Once you reach retirement age, you can withdraw money from a retirement account without facing any penalties. However, withdrawals before that age that don’t fit certain exemptions are heavily penalized.
Money invested into a retirement account will accrue value based on your personal rate of return. That rate of return is determined by market trends and your own decisions about how the funds in your savings account are invested.
Who Should Use a 401k or Roth IRA
Everyone should have a retirement account. They represent a reliable way to grow your wealth in the long term, ensuring that you can afford to retire. These accounts are especially great for people who can start saving early, although it’s never too late to start saving for retirement.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated August 8, 2019. It was originally published August 12, 2019.