The 8th Wonder of The World.
Money is pretty cool right? And knowing that compound interest is the 8th wonder of the world, (Thanks Einstein for that gem) we usually turn to dropping our money in the bank.
Problem is, that money makes next to zero doll-air-oes. Back in the 90’s when interest rates with in the 12-14% it was safe to put money in a CD at 10% interest. Today, interest on a 3-year CD is puny, 1.4%. Interest rates are down 90%, which is good for inflation and other things, but makes me think, “What do I do to grow my money?
First: let’s talk numbers. I conducted a survey and found that most people struggle with knowing where their money can grow, and what’s riskier or not.
Problem: “What tends to have the highest growth over periods of time as long as 18 years”
A. Checking Account
B. U.S. government savings bonds
D. Savings Account
What is your answer?
I’m glad to say that not a single person put Checking Account. I’ll still explain that for a moment, a Checking account is what I classify as “Cash & Cash equivalents”. It’s liquid, it’s being used day-to-day, and mine currently has a return of .02%. This isn’t where money goes to grow, it’s where a money goes to be spent.
B. U.S. government savings bonds. These investments are usually given a pretty small interest rate, and are guaranteed by the government. I was actually quite shocked by just how many people thought that this was the best place to grow money! These are given a guaranteed return, but usually is equal or less than what inflation is.
D. Savings account. A few people thought this was a good place to grow money. Savings accounts are similar to Checking Accounts, in the fact that they have very poor growth rates, usually higher than Checking, but still very low. In my mind, they are basically a way to keep your money in 2 seperate locations so you don’t spend it all. I think there are better ways to organize money, but that’s just my thoughts.
C. The Stock Market. This is where money goes to grow. Naturally there are risks, but there are many ways to mitigate the risk. Diversification, Allocation, and having a good time horizon for investments helps. With an 18 year time frame, and being diversified across many stock types, this is where money will grow.
Lets look at the data
I looked into typical rates for Savings Accounts, Checking Accounts, Government Bonds, Corporate Bonds, and the Average Stock Market Yield. Here is what $1000 dollars looks like over a 20 year investment.
www.nerdwallet.com/rates/checking-account – Zion’s Bank Checking Account
www.nerdwallet.com/rates/savings-account -Zions Bank Savings Account
www.treasury.gov/resource-center/ – Government Bonds
finance.yahoo.com/bonds/composite_bond_rates – 20 year AA corporate bonds
http://www.moneychimp.com/features/market_cagr.htm – Stocks average from 1995-2015
Looking at this, some people are probably shocked. Know that Stocks have the risk of going down, they will go down and up. Greater Risk often yields greater upside potential.
Fine, I’ll put it in stocks. How do I do that?
If you have $5000 or $10,000 to invest, put it into the stock market. There are some great places to open an account online.
TDAmeritrade has a pleasant platform that is excellent for beginners and isn’t too expensive to use at $10 per trade.
OptionsHouse is an online broker that has $5 trades and has no minimum balance.
TradeKing is another online broker that has $5 trades and no minimum balance.
My absolute personal favorite is Vanguard. The reason for that is they are all about the idea of buy-n-hold with stocks, and stock-packages called Mutual Funds or ETF’s. The idea behind that is simply buying a preset group, then waiting and letting it grow over time.
If not, you can probably talk with your Bank, Credit Union, or find a good local individual company such as EdwardJones to get you started. Make sure that if you use a broker/dealer company that you know the cost associated with it.
Checking accounts are where money goes to be spent. Savings accounts are for emergency funds and money to be used within 6-12 months. Bonds are where money grows safe but small, and the stock market is where money belongs for long-term growth.
So, open an investment account and invest! Don’t let $5000 extra dollars be left sitting for no reason in the bank.