Current economic downturns have made many people leery of investing in general. Once believed to be stable, the financial sector has been crumbling in front of all of us. As one bank after another fails the idea of investing has left a sick feeling in the stomachs of the American public and fears of losing everything has become a very real possibility. Those that were once the leaders in investment ideas are now in jail or out of work. Even with all of this, investing is still a very much needed means of growing money so the question now is where should money be placed.
PART I: Investing in yourself
When people think of investments they often times think about where they should put money in order to further grow their available money. What most don’t think of is how they can generate more money without actually saving. This is done through investing in yourself. The large majority of Americans have considerable debt.This debt is often times much higher than the rate of return on any investment. For example a credit card may have an interest rate of 20% but the rate of return on a money market account may only be 5%. This means that you would get 4 times the return by paying down debt than you would by actually investing.
Money that would normally go towards savings and investing should be taken and placed into high interest credit cards in order to pay them down. This will create more room on those cards so that there is still that safety net if money should be needed quickly but will help to reduce the amount of interest paid on the card. As these cards are paid down there will be more available money. So rather than having $100/month someone paying down debt may have $150/month extra. Just keep pushing that into cards until they are all paid off. Once this is done then it would be wise to start looking at investing a little more aggressively.
The idea here is simple, it is about going where the greatest return on investment is. While this is a very non traditional approach to investing your money and isn’t technically considered investing it is a great step in the right direction. In investing it is all about giving yourself great leverage and there’s no better way to do that then to increase disposable income. This is also a safe investment as your debt is never going to disappear on its own and there’s no risk of additional loss only greater gain as interest payments decrease.
Part II: 401K
Probably the best option for someone looking to invest a small portion of money each month is to setup a 401k. This is normally available through work where the company will match the amount invested up to a percentage or set dollar amount. This is a great way to increase savings quickly. With company matching an employee would be able to lose 50% of their money and still breakeven. This creates an incredibly low risk option assuming that the company is matching.
If the company doesn’t offer a 401k plan then there are options of creating one. There are many companies such as Ameriprise that will sit down with a potential investor and go over the different options for starting up a 401k. Depending upon the time frame that the money will be needed the advisor will assist the investor in finding a strategy that will give their money the best opportunity for growth.
Having a 401k will also allow the investor to put money away automatically and forget about it. When it is out of sight and out of mind there is less chance that the investor is going to pull the money out and use it for something else. This also means that the investor is going to trust professionals to handle their money so that they don’t have to. Even a small rate of return of 5% or more means a greater rate of return than could be achieved through many other types of savings or bonds. There may be more risk involved and the potential for loss but there is also a great potential for sizable gain. Keep in mind these professionals get bonuses based on their returns and want the best for the accounts they manage.
PART III: Savings and Money Market
Another option is to simply place the money into a savings account or money market account. By having the money placed into one of these accounts it will gain interest, but not very quickly. Normally there is a teaser rate that is much higher that will often times go down after 6 months of having the account open. Many savings accounts pay less than 1% and money markets will be between 2-3% on average. With such low rates of return it makes saving very difficult. In fact, often times the rate of return isn’t even going to keep up with the rate of inflation. So while you may be saving money and technically your money has the appearance of growth you are technically losing money each year that inflation outpaces your rate of return.
If it is simply a matter of having a place to put your money then a savings account can be a good option. While it may not have a great rate or return it allows the money to be separated so that it isn’t quite as accessible as money in the checking account. This makes saving money a little bit easier than it would be if it were easy to access. With the rate of return it would make saving in this manner better than keeping money under a pillow but not by a whole lot.
PART IV: Savings Bonds
Bonds used to be a relatively popular means of investing. They were a safe option that had a solid rate of return over a period of time. The only major problem with bonds is that they require a period of time before they can be cashed in. This forces the investor to hold onto their savings for a while longer rather than spending it. If this is a fear then bonds are a great option. If the hope is that there will be a great deal made off of the bonds then that is highly unlikely. Much like a savings account most bonds aren’t going to keep up with the rate of inflation making them more an option for gift giving and for those likely to spend accessible money.
There are bonds however that can be purchased from corporations. These corporate bonds are ones that operate much like government bonds but often times have a slightly better rate of return. Companies that issue these bonds are normally looking to beat going loan rates. With this option there is a little more risk as the company has to stay in business in order for the money to be relatively safe in an investment of this type. The other issue is that these corporate bonds are only going to be reasonable when interest rates are higher. Since the corporation is going to be attempting to beat interest rates they could get at a bank it is unlikely that an investor will be able to get a better rate of return on these bonds during times when interest rates are low.
PART V: Final Thoughts
Investing is a great means of putting away money. It offers an option that gives the investor a means of making a little more on their money than they would get by simply leaving the money in their checking account or putting it in a safe. It is important for an investor to really think about the level of risk they are willing to take on. The greater the risk they take the higher the potential of return. Through investment in stocks an investor may be able to beat out normal rates of return from savings accounts and turn high risk into high reward. It is important in this type of situation that an investor evaluate the risk and determine a strategy that works for them. It is also wise to talk to a financial advisor to help the investor make an informed decision.