By Sean T. Johnston
Low interest rates are generally a good thing, especially when you’re looking to buy a house. But low APRs swing both ways, and right now you’re probably not making much of anything off the money in your savings account.
In fact, the average APY (Annual Percentage Yield) on a traditional savings account right now is about 0.11% APY according to BankRate.com. That means a balance of $10,000 would make around $11 in interest over the course of a year.
If that doesn’t blow your hair back in excitement, you’re not alone. If you have some money in a savings account (or your mattress) and you think it could be doing more elsewhere. You have options.
But before we get into those options, let’s talk about the two main reasons most people prefer the typical savings account.
A fancy term for the ability to cash out your money. With a traditional savings account, your money is always there. You can walk up to the ATM and withdraw it any time you want. Compare that with investments like a Certificate of Deposit (CD) often require you to keep your money locked away for a period of time, where you can’t withdraw it without penalty. CDs generally offer a higher interest rate in exchange for these restrictions, so you’re sacrificing liquidity for a better rate.
Savings accounts are a safe bet. They’re FDIC insured, so there is virtually no risk of losing the money you’ve saved. But with low-risk comes low-reward.
If you’re willing to sacrifice liquidity and have a higher tolerance for risk, keep reading. If not, keep saving.
I’m sure you’ve heard of the stock market. But to the casual saver, it probably seems a little intimidating. Between individual stocks, mutual funds and those Exchange Traded Funds (ETFs) that seem to be all the rage, there’s a lot to learn.
However, a little bit of research and a few minutes of setup can go a long way to making your money work harder for you.
A brokerage account, put simply, is an investment account that you set up for the purposes of buying and selling stocks, bonds and other investments. Instead of parking your money at the bank, your brokerage account allows you to choose specific investments to make with the money you deposit.
- You can choose from thousands of investment options, each with unique characteristics to suit your preferences.
- There are fees associated with brokerage accounts when you buy and sell investments, and for the management of your account. However, the performance of your portfolio can make up for these fees.
- The minimum opening investment can vary from a few hundred to a few thousand dollars, depending on the broker.
- It can also take a couple of days to settle your transactions. So while your money remains relatively accessible, it’s not as easy to withdraw as your savings account.
Given the variety of investment options out there, it’s difficult to come up with an average rate of return. But over the past year, the Dow Jones Industrial Average went up over 18.5%.
So that $10,000 we parked in a savings account at the beginning of the article could have made $1,850 (less fees) instead of $11.
Are those gains typical? Absolutely not. But it does go to show you that the potential for higher returns is out there if you want to take the chance and make the right choices.
People lose money in the stock market and on their investments every day. Savings accounts are insured against bank losses. Your brokerage account has no such guarantees. Make sure to carefully consider your options before investing.
Where to Get a Brokerage Account
- Many traditional financial services companies offer online brokerage accounts. Click here for a comparison.
- Betterment.com offers a simplified model that allows users to simply allocate their deposits into a percentage of stocks and a percentage of bonds. This is a great option for users who want the flexibility of investing, but aren’t interested in micro-managing their investments.
I know what you’re thinking. “I just lent $20 to Kyle at work, and I probably won’t see that back – much less with interest.” Peer-to-peer (P2P) lending isn’t what it sounds like, but it is similar.
Remember that scene from “It’s a Wonderful Life” where everyone got together and kicked in a few bucks to help George Bailey pay the missing money back to Mr. Potter? That’s kind of what we’re talking about here, only a lot more formal.
Banks generally lend money for tangible goods: houses, boats, cars, etc. Many offer personal loans, but sometimes it’s not a viable option. So where do you go when you need cash for undisclosed reasons and a bank won’t lend it to you? Maybe a peer-to-peer lender.
When you deposit money into a P2P account, you choose the risk profile you’re comfortable with. You can choose to loan money to people with excellent credit (for lower returns) or take a chance on those with poor credit (for higher returns). Your deposits are combined with others and someone gets the cash they need. Borrowers then pay the loan back with interest over a fixed term of a couple of years.
- Low liquidity. Once your money has been lent to someone, it won’t be available until they pay it back.
- Like brokerage accounts, the minimum initial investment for P2P Lenders may be higher than a traditional savings account.
Rates of return on P2P loans are much higher than the APY you would see on a standard savings account. If you can afford to part with your investment for a few years, the return could be much higher. Prosper, a leading P2P lender, advertises an average return of about 9.09%.
That $10,000 in a savings account for 3 years would net you $33 in interest.
$10,000 at 9.09% for three years would net you over $2,700 in profit.
Borrowers can default on their loans and leave you with a loss. Make sure to evaluate the risks associated with P2P loans before you decide to invest.
Where to Get a Peer-to-Peer Lending Investor Account
Savings accounts are a safe place to store your money. But with interest rates hovering around a tenth of one percent, it’s not even keeping up with inflation.
If you value safety and security above all else when it comes to your money, there’s nothing wrong with keeping it in a savings account.
But, if you’re a risk taker (relatively speaking), your money could be worth a lot more in a few years if you invest it elsewhere. Maybe it’s time to take a portion of your savings and see what else it could do for you.
Link to original article: http://www.quickenloans.com/blog/savings-account-alternatives-risk-takers