Where Do People Invest?
People just starting out in the investment game are often a bit intimidated. Investing is an area where there are big rewards but also big risks. It’s not uncommon to feel like you’re completely lost and don’t know what to do next.
Here are best investments for consideration, generally ordered by risk from lowest to highest. Keep in mind that lower risk typically also means lower returns.
High-yield savings accounts
A high-yield savings account is a type of savings account with higher interest rates than a traditional savings account, typically as high as 3%. There are also higher yield CDs (Certificates of Deposit) which offer similar rates. These accounts can be hard to find, but can pay significantly higher yields than any other type of savings account (bank checking accounts generally offer very low yields). The downside to these accounts is that they are subject to penalty fees and charges if you don’t make the minimum balance required. These penalty fees can be quite steep and generally range from $20-$50 or more.
High-interest credit cards
Rewards credit cards are the holy grail of consumer credit. These cards allow you to receive frequent flyer miles, hotel points, cash back, car rentals and much more. If you ever find yourself regularly spending money on a particular company or brand, you should look into getting one of these cards from that same company. Most likely, it will offer you a rewards program that can be used for a wide variety of merchandise and services. If you’re religious about paying off your full credit card balance every month, you can basically turn your purchases into free money every single month by taking advantage of rewards programs.
Savings accounts and CD’s at credit unions
While savings accounts and CD’s at credit unions are similar to high-yield savings accounts, they sometimes offer slightly higher interest rates. These can be a great place to set aside funds for large purchases like cars or houses, as the interest rate will generally remain consistent throughout the term of your CD. These rates aren’t 100% guaranteed since they are often variable, but you should be able to count on at least a small increase in yield over time. Much like high-yield accounts, these types of accounts often require a minimum balance and will charge you for allowing your account to become underfunded. The good news is that these penalties are often much lower than those from banks.
CDs at banks
For those who don’t want to go around paying the penalty fees of high-yield or credit union CD’s, banks often offer CD’s with similar yields to the above accounts. Much like high-yield accounts, these are often variable and are subject to penalty fees if you fall below your minimum balance required. They generally require a higher minimum initial deposit as well, so it can be a bit more difficult to get one. If you have the money available and are willing to put up with these extra fees, then banks can be a good place for your money to grow over time..
Certificates of deposit (CD) at banks
Also referred to as a “CD ladder” or “jumbo CD,” a certificate of deposit is often used to cover the cost of a large purchase like a house or car. The interest rate is generally set at a fixed level for the term of the CD and can be anywhere from 1-5 years in length. The longer the term, the higher your interest rate will likely be. Not only does this make it easier for you to pay off your initial down payment and closing costs on that large purchase, but it also makes it possible for you to have enough money spread out over time that you’re able to simply keep paying into the CD every month without much worry about your balances. You can also choose to change the term at any time or even switch to a different CD, which will then allow you to keep paying off your initial deposit with interest without paying a penalty.
A traditional investment account is usually an account that is directly managed by a professional money manager such as yourself (or someone else) and charges a management fee. These accounts can be great places for investing if you’re comfortable putting more than just a few hundred dollars into them. These types of accounts have historically performed the best over the long run and are often the types that people get when they are first starting out in their investing efforts because they don’t charge high fees for opening or maintaining these accounts.
Real estate investment trusts (REIT)
REITs are very similar to traditional stocks and bonds in that they are privately held companies which publicly report their financial results each quarter. The main difference is that the shares of a REIT trade on the stock market like a common stock, but their performance is largely determined by the amount of dividend that they pay out each year rather than based on how their shares are performing in the market. Dividends are paid out from the profits of the company’s underlying real estate investments, not from ownership of company earnings.