Savings are an essential aspect of financial health. However, they don't contribute to money growth. If you want to move to the next level of money management, you need to start putting your money into products to earn you more money.
All investments, regardless of their form, start with a small amount of risk, whether that's bonds, stocks, or mutual funds. Regular savings accounts don't have that risk and don't offer a high-interest return in exchange for no risk.
Investments won’t give a high return overnight. They generally take time, with products like index funds taking 10+ years to see a healthy return.
Before you read the top 8 best ways to invest your savings, assess what you have to invest with, how much time you have for investing and what you're willing to risk to reach your goals. Then use this list to narrow down your options using the pros and cons summaries and descriptions of each product.
1. High-Yield Savings Accounts
- Pros: Low risk, FDIC protection
- Cons: Low interest, requires a large deposit
Although technically not an investment product, these savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC) and offer a higher interest rate than a traditional savings account. They may be the first product you encounter that will give you money back on your money.
These accounts usually require a deposit to open, are sometimes restricted to the bank clients in good standing, and often limit access to the account.
A high-yield account isn't an account where the money is deposited and then withdrawn within a short period of time, consider it locked in once it’s deposited. In exchange for that high-interest rate, you have an obligation to keep the money in the account to generate interest.
Still, some high-yield savings accounts offer options like tax-exemption or discounts on additional products with the same banking institution. You may or may not be subject to fees with this type of account.
As a low-risk and low return account, make sure to look for the high-yield account that best suits your situation, and don't be afraid to shop around.
2. Money Market Funds
- Pros: Low risk, Quick liquidity, some are tax-exempt
- Cons: Low interest, not protected by FDIC
A money market fund is a mutual fund that focuses on short-term debt securities. The funds are subdivided into categories of prime, government, and municipal, with municipal, often being tax-exempt.
A step above a high-yield savings account, money market funds offer a low-level risk for investment and a high liquidity level. High liquidity means you can get your money out within a few days if necessary, rather than being locked in as you would be with another investment product. Many money market funds will even allow check writing from them.
Money market funds are a step up from a high-yield savings account with a higher (variable) interest rate and a low risk of losing your principal investment. Check local and state guidelines when it comes to tax-exemption on money market funds.
However, unlike savings accounts, these funds are mutual funds, so they are not backed by the FDIC. Instead, money market funds are supported by the Securities and Exchange Commission (SEC) who regulates the industry but won't keep you from losing your money.
3. Treasury Bills and Notes
- Pros: Low risk, government-guaranteed, local/state tax exemption
- Cons: Low return, requires long maturity to earn a high return
Treasury Bills are a safe, low-risk investment vehicle with a zero-default risk thanks to a government guarantee. Essentially, buying a treasury bill is buying a debt obligation from the U.S. Department of the Treasury.
Treasury bills can be a low investment risk simply because you can purchase the bills or notes with as little as a $100 investment.
While possessing low to no risk, this product offers a low return and requires a more extended maturity date to provide a higher return. No interest is paid until the bond matures, so treasury bills are subject to the interest rate at the time of maturity.
The income generated from these bills or notes is usually exempt from local and state taxes but not federal taxes.
4. Certificates of Deposit (CDs)
- Pros: Low risk, insured by FDIC
- Cons: Low interest, locked for a set amount of time
Another low risk, low-interest product issued by banks, certificates of deposit, offer a higher interest rate than savings accounts while being insured by the FDIC up to $250,000. Purchasing a CD may require a minimum amount which will vary from bank to bank.
Although not as liquid as mutual funds, once you purchase CDs, your investment is locked for a pre-set amount of time, just like treasury bills are. You can't take your money back out without a significant penalty.
However, suppose you don't need this income and want to keep yourself from spending it. In that case, this can be a great product to purchase as once you do, it's out of your hands, much like having money automatically deposited into a savings account each paycheck to help keep you from spending it.
Like treasury bills, CDs are subject to the interest rate when they are pulled from maturity. Consider laddering CDs by purchasing multiple CDs with different maturity terms. This allows you to remove one if interest rates are higher after one comes to term and take advantage of the higher return.
Conversely, if interest rates are low when you reinvest the CD after it comes to maturity, you'll earn less on the newly invested CD.
While low interest, CDs, if invested in properly, whether through laddering or smart choices and shopping around, can be one of the best ways to invest savings for beginners.
5. Short-term Corporate Bond Funds
- Pros: Short maturity compared to stocks
- Cons: Higher risk, sensitive to interest rates
With maturities of less than five years, corporate bond funds are issued to investors by companies to raise money. You essentially give them a mini-loan and collect the interest as a return.
This product offers a slightly higher risk than money market funds as companies can default, although larger corporations are less likely to do that and the government even less so.
Whether corporate or government securities, it offers a slightly higher yield to accompany a somewhat higher risk. Always read and research the portfolio to ensure you completely understand what you're purchasing; at this point, a financial advisor can come in handy to help find the right mix of corporate, government, and municipal bonds.
Whether online or in-person, brokers can help you set up a portfolio. Shop around as some brokers will require a minimum account deposit of $1000 or more.
There is also the option of “ultrashort bond funds,” which mature between 6-12 months, these products are susceptible to changing interest rates, and like short-term corporate bonds, bond funds are not FDIC insured.
6. S&P 500 Index Funds
- Pros: Higher return, highly liquid
- Cons: Long term investment to see a return
Index funds are a fantastic way to build and fill out a portfolio and thus one of the best ways to invest your savings because your money is working for you to diversify your investment and lower your risk.
Investing money in stocks can be low risk with a long-term higher return; however, it will never be zero risk.
Unlike the banking products listed earlier, index funds involve longer-term investments; this is not for a year or two. CDs or money market funds can offer shorter-term investment opportunities of 6 months to 5 years, but index funds are typically purchased with a 10+ year goal in mind. Generally, these are investments for retirement.
An S&P 500 index fund is an investment vehicle that is often a mutual fund or exchange-traded fund (ETF) that invests in the top 500 stocks that make up the S&P 500 market Index.
By investing in a section of the market instead of just one company, you're able to see how the market is fairing without putting all your money into only one company, and you're guaranteed to do as well as the market does.
Also, by not putting all your money in one stock, you are afforded an excellent lower-risk way to invest. Note the use of the word “lower” here because investing in an index fund does come with some risk, but it is a lower risk than picking individual stocks. It also features low fees, which means more of your money stays in the portfolio.
These funds are also highly liquid, so they can be bought and sold any day the market is open. Of course, investing requires money to sit in investment vehicles to earn more money.
7. Nasdaq-100 index funds
- Pros: Diversity of portfolio lowers risk, higher return
- Cons: Subject to market and companies' success
Like the S&P 500, the Nasdaq-100 index fund focuses on the top 100 companies on the Nasdaq composite stock market.
Offering some of the most substantial-tech and non-financial companies like Apple and Facebook, these index funds are an excellent opportunity for investors who want to take on some risk with a publicly-traded stock without worrying about figuring out who will win and lose on the Nasdaq. Why pick just one company when you can choose a hundred?
While primarily considered a technology index, almost 50% of the Nasdaq is in other industries such as retail, customer service, and biotechnology. The top 10 companies of the top 100 hold close to 50% of the index. This spread means if one sector slumps in the economy for some reason, other companies still hold up the stocks.
This sector slump or upset happened in 2020. As the economy changed, especially with the effect of COVID-19 on airlines and travel companies, other companies like video calling applications are benefiting from the new work-from-home status.
Choosing a variety of stocks and diversifying your portfolio is the key to avoiding a considerable upset. While any company can experience upset and fall, they can also recover quickly. Do your research and speak with a professional if necessary when entering this arena, especially if this is your first time investing.
8. Rental Housing
- Pros: Physical asset, monthly income
- Cons: Housing market always in flux, tenant and property issues
Rental housing as an investment involves the most work of all the best ways to invest your savings and holds the highest risk. Investing in this method is more than a few clicks on a computer. The method consists of selecting the right property, financing it, finding the right tenants, and maintaining the property or hiring a property management company.
Rental housing is a long-term investment and one that may be better suited for people looking to save for retirement in the future while working. It offers the risk that you may overpay for the housing, choose tenants that damage property, or be unable to pay rent due to sudden employment.
At the same time, housing is an asset and can be sold for cash or through a bank through cash-out refinancing.
To Sum Up
Investing can be easy, but you will have to take a little risk to take advantage of higher interest rates when it comes to high returns. You don't have to throw all your money at a stock and hope for the best, of course. Maybe a stock is just too risky for you, but locked-in CDs with a 5-year maturity is an acceptable level of commitment.
With the eight best ways to invest your savings, which offer various options regardless of your experience in investing or the amount of risk you're willing to take on board. This list is a jumping-off point and a way to start a conversation with a broker or a bank's financial advisor.
No matter which product or investment vehicle you choose to put your money to work for you, the important thing is to educate yourself about your options and then shop around for a brokerage account or bank that can make the most of your hard-earned savings.