Investing is a way of putting your money to work, as properly invested funds can earn additional money. A money investment calculator can show you how much you can expect to earn over time at various interest rates. However, there are literally thousands of different ways to invest money. What is appropriate for one investor might not be for another one. When considering money investment options, you must consider your investment objectives and risk tolerance.
Always do your own research or work with a professional adviser before putting your money at risk.
Top 10 Ways to Invest Your Money
Investing can be overwhelming for beginners because there are so many ways to invest. However, many of the more esoteric investments are best left to professionals. For example, complicated, leveraged or derivative investments like futures and options may serve a purpose but they also carry a high risk of loss.
For the average investor, there's a much more manageable range of investment categories to consider, each of which can help an investor reach his goals.
By discussing 10 relatively simple ways to invest your money, you'll get a good idea of the varying risks and return characteristics of different investment types.
For investors looking for safe investments, U.S. Treasuries are at the top of the pyramid. U.S. Treasuries are investments backed by the full faith and credit of the U.S. government. This means that the government guarantees the payment of interest and principal on these investments.
This guarantee can be satisfied in any number of ways. Typically, the government simply issues new securities to investors and uses the proceeds to pay off existing investors. However, if the need arose, the government could use its authority to impose taxes to raise additional funds, or it could even simply print more money.
As the U.S. government has never defaulted on a Treasury security, they are considered among the safest investments in the world.
U.S. Treasuries are divided into three main types: bills, notes and bonds. Treasury bills have a maturity of 52 weeks or shorter, while notes mature in 2 to 10 years. Bonds have maturities of over 10 years.
Interest paid on Treasury securities is federally taxable but is free from state tax. You can buy Treasuries at regularly scheduled auctions or from a broker.
Certificates of Deposit
Certificates of deposit, or CDs, are another very safe investment, perhaps one notch below Treasuries. CDs are insured by the Federal Deposit Insurance Corporation, or FDIC, up to $250,000.
A CD pays a stated rate of interest until it matures, at which time the funds become available to investors. CD maturities typically range between three months and 10 years, with longer terms often paying higher interest rates.
The primary drawback to CD investing is that withdrawing money before maturity incurs a penalty, often between three months and one full year of interest. Longer-term CDs also require investors to tie up their money for extended periods of time.
High-Yield Savings Account
A high-yield savings account can be a great parking place for money that you might need quick access to. Unlike a CD, a high-yield savings account doesn't have any maturity date; you're free to withdraw your funds at any time, although certain transactions are limited to 6 per month. Just like CDs, high-yield savings accounts carry FDIC insurance.
As banking is such a competitive industry, high-yield savings accounts have evolved to take business from traditional banks. You can generally earn the highest yields on these types of savings accounts by going with an online bank, which has reduced overhead due to the lack of physical branches.
Although online high-yield savings accounts can pay 20 times or more the yield you can get from a traditional savings account, there are some drawbacks. Without physical branches, online banks limit interaction with tellers and customer service representatives to phone calls. Making deposits can also be more challenging, particularly if you intend to deposit cash.
In addition to Treasury bonds, there are many other types of bonds in which you can invest if your primary goal is to earn interest. A bond is an IOU from an issuer to an investor. In exchange for your investment, you receive a stated interest rate and a promise of the return of that money at a future date.
Of course, this "promise" is only as reliable as the financial strength of the issuer. With Treasury bonds, this promise is rock-solid. However, bonds issued both by municipalities and corporations do carry the risk of default. Many bonds carry ratings issued by outside agencies to help investors gauge the level of risk with an individual bond.
Corporate bonds pay taxable interest, while municipal bonds pay interest that is federally tax-free. Municipal bond interest is also often tax-free in the state in which it is issued. Many municipal bonds carry outside insurance, giving them the top available safety rating of AAA and providing peace of mind for investors.
Mutual funds are pooled investment funds that are overseen by a professional money manager. Each individual shareholder owns a representative share of the investments that the manager purchases on the fund's behalf.
There are countless types of mutual funds, investing in everything from the broad U.S. stock market to industrial companies in India. Mutual funds have investment objectives ranging from aggressive growth of income to preservation of capital.
Mutual funds are a good option for investors looking to own a diversified investment without making tens or hundreds of different individual purchases. They're also a good option for investors looking for professional management of their investments.
Fees can vary wildly among funds. Some funds charge a fee of between 1 and 5 percent to buy or sell, while others are "no-load" and are free of such charges. All funds have an annual expense ratio, which is the amount that the fund charges investors for the ongoing expenses of running a fund. These expenses can total 1 percent or more annually.
Robo-advisers are a relatively new entrant on the investment scene, combining elements of professional management with convenience and low costs. Through the use of a questionnaire, a robo-adviser will analyze your risk tolerance and investment goals to create an investment profile. Your funds will then be allocated to a predetermined portfolio of exchange-traded mutual funds that matches the results of your questionnaire.
Robo-advisers charge low annual fees, typically around 0.25 percent. They also have low minimum investment requirements, sometimes as low as zero dollars. The trade-off is that the investment options are still a bit limited, and portfolios are somewhat generic.
Robo-advisers can be a good choice for beginning investors or those looking to allocate their funds at a low cost. The field is continuing to evolve with some robo-advisers offering a higher level of service for a larger fee and others incorporating more active management.
Although countless reality TV shows have cropped up representing real estate as a short-term investment to be "flipped," real estate is traditionally considered as a long-term investment.
Real estate can be a growth investment, an income investment or a combination of the two. For example, an apartment building can generate rental income, but the property itself might also appreciate in value. Single-family homes are generally intended for long-term growth, along with the creation of a home for an individual family. However, a second home may be both a personal vacation property and a holiday rental.
Investors that don't want the hassle and commitment of purchasing their own homes or buildings can opt for real estate investment trusts, or REITS. These investments are similar to mutual funds but trade like stocks on the stock exchange and can be bought or sold at any time. Portfolio managers invest the funds in different types of real estate investments according to the rules of the fund's prospectus.
Retirement accounts are not investments per se but rather accounts with special tax characteristics that can help you save for your long-term goals. Typically, money you put into a retirement account is tax-deductible, and the funds within your account grow tax-deferred until you take the money out at retirement.
Many larger corporations offer a 401(k) retirement account, which traditionally offers a range of mutual funds to invest in alongside the tax benefits. Many companies will also contribute to these accounts on your behalf, matching a certain percentage of your own contribution.
If you don't have access to a 401(k) at work, an individual retirement account, or IRA, can be a good option. As individual accounts, IRAs allow you to invest in nearly anything you would like, from individual stocks and bonds to mutual funds and exchange traded funds (ETFs). However, you won't benefit from any company match.
A Roth IRA is a special type of IRA with the reverse tax characteristics of a traditional IRA. You won't get a tax deduction on the money you contribute to a Roth IRA, but you can pull your contributions and earnings out tax-free after age 59 1/2.
A well-diversified portfolio contains assets that are non-correlated, meaning they move up and down in price at different times. Nontraditional assets such as precious metals, commodities and collectibles are examples of assets that are not very correlated with more traditional assets like stocks and bonds.
While these assets shouldn't dominate the holdings of an average investor, they can help smooth out the overall volatility of a traditional portfolio. For example, if you have 10 different mutual funds but they're all tied to the U.S. stock market, you can expect them all to fall when the stock market declines. Assets like gold, on the other hand, often go up in times of market panic. By holding both types of assets, you can avoid watching your entire portfolio go down at the same time.
You can buy nontraditional assets in numerous forms. Gold, for example, can be bought in its pure state in the form of coins and bars. However, for most investors, the easiest way to own commodities, like wheat or precious metals like gold and silver, is via a mutual fund or ETF.
Investing in Yourself
One of the investments that can pay the greatest long-term dividends is an investment in yourself. Your long-term earning potential is the greatest asset you have, so the more you can enhance that ability, the more better off you will be in the long run.
With the economy changing every day, taking classes to learn new skills can pay off. Some career advisers suggest re-skilling as often as possible to avoid being phased out as obsolete in an era of increasing automation. Others suggest that re-skilling is an optimal way to enhance your career prospects, as there is a constant shortage of highly skilled workers.
On the personal front, investing time, money or both in personal fulfillment can lead to a more enriched life.
- TreasuryDirect: Treasury Securities & Programs
- Federal Deposit Insurance Corporation: A Guide to What Is and Is Not Protected by FDIC Insurance
- Advisor InTouch | Penn Student Registration & Financial Services| Penn Srfs
- FINRA: Retirement
- Linkedin: Impressions from Davos: A Reskilling Revolution Needs to Happen - and It Needs to Begin Now
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.