By, Greg Johnson
With many banks offering an APY rate of 0.03% or less, using a savings account as a long-term investment option is not your best money move. You won’t be growing rich by watching your account grow in pennies.
Don’t fool yourself into thinking that you are keeping your money safe in these risk-free savings accounts either. Stashing your money in a low-interest savings account means you’re just robbing yourself of potential earnings as inflation eats into your buying power.
Right now, you’ve got time on your side. Maybe you have 10 plus years to let your savings grow but sticking with a crappy savings wastes the benefits that time can have on your money’s growth.
Instead, use your time more wisely. Take advantage of it. Make your money work smarter for you by placing it in one of these five places instead. Just be aware that these other investments might increase your returns, but might be a bit riskier and your investment returns could go up and down, unlike a savings account.
One of the investments I made (outside of my retirement account, that is) was to buy a rental property. Becoming a landlord is an excellent way to create residual income because people will always need a place to live.
Even if I decide down the road that being a landlord is no longer right for me, I can sell my property and reclaim most, if not all, of my costs. Better yet, as home values increase, I could (and should) turn a profit.
“But I don’t want to deal with renters…”
I hear you. There are several inconveniences that come with wearing the landlord hat. However, these temporary issues seem so minor when compared with the benefits.
You wouldn’t start a new job without expecting some pain points, right? The same principle applies with real estate investing. It’s not a hands-off job, but your money has the chance to grow faster than in a traditional savings account.
Do you love the idea of investing in real estate but hate the idea of managing your properties? Crowdsourced real estate companies like Fundrise and RealtyShares allow you to invest in real estate properties minus the headaches of being a landlord.
Instead of investing in the typical public stocks and bonds, you can diversify your portfolio by investing in private market real estate. That means the money you invest will be used to purchase individual properties.
Fundrise is a great option for the average investor. With just a $500 minimum investment, you can invest in Fundrise’s starter portfolio package. If you aren’t satisfied with the performance or the company after 90 days, you can receive your money back. If you do love the company, you can upgrade to an advanced plan for free once you invest $1,000.
RealtyShares is another great option, but it’s a little harder to get started. Here, the minimum investment is $5,000. You’ll also need to be an “accredited investor” to qualify. Still, with over $700 million already invested, it’s something worth checking out.
Are you taking advantage of your work-sponsored retirement accounts?
If you have the option to invest in a 401k through your job, then do it. Not only will contributing boost your retirement savings, it can benefit your taxes as well. Contributing can reduce your tax liability at the end of each year and decrease your income tax withholdings each pay period. Your contributions can even bump you down a tax bracket.
If your employer matches a portion of your 401k contributions, you should contribute at least enough to meet the match. For example, if you earn $75,000 a year and your employer matches the first 4% of your 401k contribution, you are essentially getting an extra $3,000 in free money each year without putting in any additional work. Stick with that company for 10 years and that is $30,000… and that’s assuming you never earn a raise! It doesn’t the interest the money will earn either. Over a decade, that’s almost one-third of your annual paycheck in free money!
Whether you have a 401k or not, you may be able to invest your money in an IRA, a.k.a. an individual retirement account. They are a great way to save money over the long term.
When it comes to IRAs, there are two types to choose from – traditional and Roth. With a traditional IRA, you can save on your taxes now and allow your money to grow tax-deferred. In theory, you’ll pay less in taxes because you’ll be taxed at a lower rate during retirement.
On the other hand, you’ll fund a Roth IRA with after-tax money. Because you’ll pay taxes on the money now, the money in your Roth IRA grows tax-free. Consider both options carefully before deciding on which type of IRA is right for you.
Look, I am not a complete hater of savings accounts. They are necessary when you need a place to stash your emergency fund or short-term saving goals.
Still, there are better places to stash your cash than at a brick and mortar bank.
Online savings accounts typically offer a significantly higher APY than their traditional banking competitors. For instance, an online bank with a rate of 1.45% APY on their savings accounts offers almost 50x more in interest than traditional banks who offer just 0.03% on a similar account. That’s a huge difference!
Online accounts are also beneficial for specific savings goals and emergency funds. Because the money is held separately from your general funds and accounts, you are less likely to dip into the money for unnecessary purchases.
Once you build up your savings, it’s once again time to look for better investment opportunities for majority of your money. Doing so will help make your money work harder for you and give you the chance to build real long-term wealth.
Like I alluded to earlier, savings accounts aren’t horrible, and they can be useful for building an emergency fund. In fact, I applaud you for making the decision to save any money at all.
However, to build real wealth, you need to find ways to make your money work for you. Don’t keep all of your money in one place, and look for ways to earn more interest on the money you already have. Doing so can be the key to a wealthy and financial healthy future.
Greg Johnson is a personal finance and frugal travel expert who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. He is the co-owner of the popular blog Club Thrifty, where he teaches others how to spend less and travel more.