What Should You Do With Your Extra Cash?
Investing scares off many people partly because of the stereotyping of those who participate in it the most. Many people who work in the investment world eat, sleep, and breathe stocks and shares, making it an intimidating environment to jump into. The truth is that investing can be for anyone. You don’t have to be a Wall Street big shot, your age is irrelevant, and while your salary may be a contributing factor, it is certainly not the most important element.
Whatever image you have in your head of an investor, wipe the slate clean and concentrate on the facts. Breakdown the processes with some research, take advice from people you trust, and put yourself in a position to invest. Removing the stigma is key so you can focus on the best possible investments for your unique situation.
When done responsibly, investing is the best way to grow your money, and most types of investments are accessible to virtually anyone regardless of age, income or career.
Such factors will influence which investments are best for you at this particular moment in time and they may shift over time.
With that in mind, let’s delve into some key investment opportunities for you to consider putting your hard-earned cash into.
Investing In A High-Yield Savings Account
A cash management account is like a savings account-checking account hybrid. They may pay interest rates similar to savings accounts, but are typically offered by brokerage firms and may come with debit cards or checks.
Online savings accounts and cash management accounts provide higher rates of return than you’ll get in a traditional bank savings or checking account.
Most Suitable for: Savings accounts are best for short-term savings or money you need to access on the odd occasion, repairs or a holiday for example. Transactions from a savings account are restricted to a monthly total of six.
Cash management accounts offer greater flexibility and similar, or in some cases, higher interest rates which make them a very attractive investment option.
How to open a savings account: Online banks tend to offer higher rates than what you’ll get at traditional banks with physical branches due to lower overhead costs.
How to open a cash management account: Investment companies and robo-advisors tend to offer competitive rates on cash management accounts. It is worth shopping around yourself but established and reliable providers include Betterment and SoFi.
Investing In Certificates Of Deposit
A certificate of deposit (CD) is a federally insured savings account that offers a fixed interest rate for a defined period of time.
Most Suitable for: A CD is for money you know you’ll need at a set date in the future, such as a deposit for a car, house, or wedding.
If you’re trying to securely increase your money with a specific goal in mind, within a predetermined time frame, CD could be an ideal option.
It’s important to note, though, that to get your money out of a CD early, you’ll likely have to pay a fee.
As with other types of investments, don’t buy a CD with cash you will need soon as common term lengths are one, three and five years respectively.
How to buy CDs: CDs are sold based on term length, and the best rates are generally found at online banks and credit unions.
Investing In Money Market Funds
Money market mutual funds are an investment product, not to be confused with money market accounts, which are bank deposit accounts similar to savings accounts.
When you invest in a money market fund, your money buys you a collection of high-quality, short-term government, bank, or corporate debt.
Most Suitable for: Money you may need sooner rather than later that you’re willing to expose to a little more market risk. Money market fund growth is more akin to high-yield savings account yields.
Investors also use money market funds to hold a portion of their portfolio in a safer investment than stocks, or as a holding pen for money earmarked for future investment.
While money market funds are technically an investment, don’t expect the higher returns (or increased risk) of other investment options that may be available to you.
How to purchase a money market mutual fund?: Money market mutual funds can be purchased directly from a mutual fund provider or a bank. However, the broadest selection will be available from an online discount brokerage, therefore you’ll need to open a brokerage account if you have not done so already.
Investing In Government Bonds
A government bond is essentially a loan paid from you to a government entity. Over the term of the bond, the entity will pay interest back to the investors. Because of that steady stream of payments, bonds are known as a fixed-income security.
Government bonds are virtually a risk-free investment, as they’re backed by the full faith and credit of the U.S. government.
The fixed income and lower volatility of bonds make them common with investors nearing or already in retirement, as these individuals may not have a long enough investment horizon to weather unexpected or severe market declines.
Some will hesitate before buying bonds for the sole reason that to gain safety, you sacrifice some percentage of possible return with government bonds.
If you were to have a portfolio of 100% bonds (as opposed to a mix of stocks and bonds), it would be substantially harder to hit your retirement or long-term goals. Nevertheless, it is still a sound investment if you have the patience to see it through.
How to purchase government bonds?: You can buy individual bonds or bond funds, which hold a variety of bonds to provide diversification from a broker or directly from the underwriting investment bank or the U.S. government.
Investing In Corporate bonds
Corporate bonds operate in the same way as government bonds, only you’re making a loan to a company, not a government. As such, these loans are not backed by the government, making them a riskier option.
If it’s a high-yield bond (often referred to as a junk bond), these can actually be substantially riskier, taking on a risk/return profile that more resembles stocks than traditional bonds.
Most Suitable For: Investors looking for a fixed-income security with potentially higher yields than government bonds, and willing to take on a bit more risk in return.
In corporate bonds, the higher the likelihood the company will go out of business, the higher the yield. Conversely, bonds issued by large, stable companies will typically have a lower yield. It’s up to the investor to find the risk/return balance that works for them.
How to purchase corporate bonds?: You can buy corporate bond funds or individual bonds through an investment broker, in similar fashion to government bonds
Investing In Mutual funds
A mutual fund is an investment option that pools cash from investors to buy stocks, bonds, or other assets. Mutual funds offer investors an inexpensive way to diversify.
This is done by spreading their money across multiple investments to hedge against any single investment’s losses.
Most Suitable For: Some funds limit the scope of their investments to companies that fit certain criteria, such as technology companies in the biotech industry, or corporations that pay high dividends.
That allows you to focus on certain investing niches. If you’re saving for retirement or another long-term goal, mutual funds are a convenient way to get exposure to the stock market’s superior investment returns without having to purchase and manage a portfolio of individual stocks.
How to purchase mutual funds?: Be aware that mutual funds typically require a minimum initial investment of anywhere from $500 to thousands of dollars, although some providers will waive the minimum if you agree to set up automatic monthly investments.
Mutual funds are available directly from the companies that manage them, as well as through discount brokerage firms.
Almost all of the mutual fund providers we review offer no-transaction-fee mutual funds (which means no commissions) as well as tools to help you pick funds.