How to Make Money With Your Savings

To grow personal wealth, individuals can employ various financial strategies to make their savings work for them. This involves moving funds into accounts and investments designed to generate returns over time. Understanding these methods can help in making informed decisions about where to place funds.

Interest-Earning Savings Options

High-yield savings accounts (HYSAs) offer interest rates significantly higher than traditional savings accounts. These accounts are found at online banks, which can offer better rates due to lower overhead costs. HYSAs are suitable for emergency funds or short-term financial objectives, providing liquidity and a better return. Interest earned on these accounts compounds, meaning interest is calculated on the initial deposit plus any accumulated interest.

Certificates of Deposit (CDs) provide a fixed interest rate for a predetermined period. When opening a CD, funds are deposited for a specific “term,” and a penalty is incurred if money is withdrawn before the maturity date. The interest rate is locked in for the entire term. A strategy known as CD laddering involves investing in multiple CDs with staggered maturity dates, which can help balance higher long-term rates with access to funds at regular intervals.

Money market accounts (MMAs) combine features of both savings and checking accounts. They offer higher interest rates than standard savings accounts and may include limited check-writing or debit card access. While MMAs provide more flexibility than CDs, they may have minimum balance requirements or transaction limits. Like HYSAs and CDs, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor, per institution.

Investment Vehicles for Growth

Stocks represent ownership shares in a company, offering two primary ways to generate returns. Capital appreciation occurs when the value of the shares increases. Additionally, companies may distribute a portion of their earnings to shareholders as dividends. Individual stocks can offer substantial growth potential, but they also carry higher risk due to their direct exposure to a single company’s performance.

To mitigate risk, many investors choose diversified options such as mutual funds and Exchange-Traded Funds (ETFs). Mutual funds pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. ETFs are similar to mutual funds in their diversification but trade on stock exchanges throughout the day. Both mutual funds and ETFs provide a convenient way to gain exposure to a broad range of assets, spreading investment risk.

Bonds function as loans made by an investor to a government or corporation. When purchasing a bond, the investor lends money to the issuer for a specified period, receiving regular interest payments. At the bond’s maturity date, the original principal amount is repaid to the investor. Bonds are considered fixed-income investments, and their value can fluctuate in the secondary market based on prevailing interest rates and the issuer’s financial stability.

Real Estate Investment Trusts (REITs) offer an indirect way to invest in real estate without directly owning physical properties. REITs are companies that own, operate, or finance income-producing real estate across various sectors. They are publicly traded, allowing investors to buy and sell shares on stock exchanges, similar to stocks. REITs are required to distribute a significant portion of their taxable income to shareholders as dividends.

Strategies for Maximizing Investment Potential

Compounding is where earnings from an investment generate their own earnings. This means interest is calculated not only on the initial principal but also on the accumulated interest from previous periods. The more frequently interest is compounded and the longer the investment period, the more rapidly the overall balance can grow. This effect can enhance long-term wealth accumulation.

Diversification involves spreading investments across different asset classes, industries, and geographical regions. This strategy aims to reduce the impact of poor performance from any single investment on the overall portfolio. By combining assets that may react differently to market conditions, diversification can help manage overall portfolio characteristics. While it does not eliminate all risk, it can smooth out volatility.

Dollar-cost averaging is an investment approach where a fixed amount of money is invested at regular intervals, regardless of market fluctuations. This method leads to buying more shares when prices are lower and fewer shares when prices are higher, potentially lowering the average cost per share over time. It removes the need to try and predict market movements, promoting disciplined and consistent investing.

Automating contributions to savings and investment accounts simplifies the process of consistent saving. Setting up automatic transfers from a checking account ensures that funds are regularly moved into designated growth vehicles. This systematic approach helps maintain financial discipline and ensures that investment strategies are consistently applied over time. Consistent contributions, combined with compounding, can contribute to achieving financial objectives.

Establishing clear financial goals provides direction for investment decisions and helps maintain focus. Whether saving for a down payment on a home, retirement, or another objective, specific goals can guide the selection of appropriate investment vehicles and strategies. Regularly reviewing and adjusting these goals ensures that investment plans remain aligned with personal financial aspirations.

Tax Considerations for Investment Returns

Understanding the tax implications of investment returns is important, as taxes can reduce the net amount earned. Investment accounts fall into two categories: taxable accounts and tax-advantaged accounts. Taxable accounts, such as standard brokerage accounts, require taxes to be paid on investment income and gains in the year they are realized. Tax-advantaged accounts, like Individual Retirement Arrangements (IRAs) or 401(k)s, offer benefits such as tax-deferred growth or tax-free withdrawals, depending on the account type.

Interest income earned from savings accounts, Certificates of Deposit, and most bonds is taxed as ordinary income. This means it is subject to the same tax rates as wages or salary. Financial institutions report this income to the Internal Revenue Service (IRS) and to the account holder on Form 1099-INT at the end of the year.

Dividends from stocks can be classified as either qualified or non-qualified, with different tax treatments. Qualified dividends are taxed at lower long-term capital gains rates. To be considered qualified, dividends must meet specific criteria, including a holding period requirement for the stock. Non-qualified, or ordinary, dividends are taxed at an individual’s ordinary income tax rate. These distinctions are reported on Form 1099-DIV.

Capital gains arise when an investment asset is sold for more than its original purchase price. The tax rate on capital gains depends on how long the asset was held. Short-term capital gains result from selling an asset held for one year or less, and these are taxed at ordinary income tax rates. Long-term capital gains, from assets held for more than one year, qualify for lower capital gains tax rates. Profits from selling investments are reported on Form 1099-B.