Best Ways to Earn Interest on Your Savings
For many younger professionals, retirement is a long way off. Thinking about saving for the future is difficult, especially when present-day bills and expenses take up a large portion of your earnings. Everyone has heard about the magic of compounding interest in 8th grade math class, but it can be hard to foresee your meager savings turn into something substantial, even if it is tripled or quadrupled by the time your retirement comes around.
There are conventional ways to create a nest egg (whether you plan to use it for retirement or for some other purpose), and there are other ways to grow your savings consistently with little effort.
Get rid of debt
First of all, making money from your savings is a futile activity if you are paying a higher interest rate on borrowed money. Of course, you need a house and a car, and both of those usually require loans. However, credit card debt can be a big money eater. It is no use making 5% on your money in a money market account when you are losing 19% on the money you owe the credit card company. The easiest way to avoid this “less-than” equation is to pay down your credit card before investing. This can be difficult to do, but its worth it because you can actually re-invest your future interest earnings instead of putting them towards paying off your outstanding debts.
Go long term
If you want to go with a traditional CD, plan to stay in it for the long term. Interest rates on CDs (Certificates of Deposit) are low right now. They are lowest on short term CDs. You might not even earn 1% if you put your money in a 6 month or one year CD today. Rates are higher the longer you promise to keep your money in a CD. If you go for five or ten years, you can see a 3%-5% annual return.
Divide your money
If you feel that you have a solid base savings (in CDs, low-risk mutual funds or government-backed bonds), why not take a little risk with a portion of your investment money. You don’t even need to be an expert in the stock market. Mutual fund companies like Vanguard offer clearly labeled funds that have a higher yield potential (but with higher risk). A less risky option (but also one that has a lower earnings potential) is to invest in a mutual fund that is designed to follow NASDAQ, Dow Jones or S&P 500 companies. These markets will go through ups and downs, but should produce good growth in the long term.
Research your options
Explore money market accounts and interest-bearing checking accounts. Interest rates are currently quite low for money market accounts, but it is worth keeping an eye on rates (they used to be as high as 5% before the latest recession). Though you need to have a large amount of cash flowing through these types of accounts to really earn money, a small amount of interest is better than nothing. Also, the checking or money-market money is more easily accessible than it would be in a CD or in the stock market. If you can qualify for a rewards savings account (where you receive a higher interest rate if you keep a certain balance and use your debit card and make monthly deposits), you may be able to earn decent rate of return.
Save a little each month so that you can step up the interest rate ladder. If you are saving for a 5 year CD or waiting to have the minimum amount of money to invest in one of Vanguard’s mutual funds (about $3,000 currently), keep your money in an interest-bearing savings account or one of the other accounts mentioned in #4. This will allow you to start earning interest right away rather than forcing you to keep the money under your mattress, where it earns nothing, until you reach the savings threshold.