For best results when playing most games, you need to think strategically. It's the same with your financial life: With a little strategy, you can make the most of your money -- and make more money.
There are gobs of ways that you can put your money to work for you instead of just buying something or parking it in a savings account that's paying very little in interest. Here's a look at three powerful ways to build your wealth and your future financial security.
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No. 1: Pay down your debts
There's a good chance that you're carrying a little or a lot of debt, and much of it might be on high-interest-rate credit card accounts. You're not alone, though. Per the Experian credit reporting agency, the average U.S. consumer recently had a balance of $5,551 in credit card debt. Many households feature two or more such people and therefore have $10,000 or more in debt.
What does your debt load have to do with putting your dollars to work? Well, think about debt repayment as a kind of investing -- in reverse. If you owe $10,000 or $20,000 and you're paying a not-unusual interest rate of 20% on your debt, that's $2,000 or $4,000 that you're forking over to the credit card company each year -- in interest alone. The stock market's long-term average growth rate is close to 10%, and only the best investors can hope to average 20% (with most not achieving that).
Yet credit card companies are reaping that kind of return -- off you. If you retire that debt, you'll stop spending that 20% each year and it will be very much like earning a guaranteed 20% return. You'll be keeping that $2,000 or $4,000 in your pocket instead of sending it to your credit card company, and you can deploy it toward retirement savings or other goals.
Paying off debt, even mountainous debt, is daunting, but it can be done. A first strategy to try is negotiating with your credit card company. Call and ask if it will lower your interest rate. Surprisingly, many lenders will agree to do so if you've been a loyal and good customer, in order to keep you around.
No. 2: Invest in dividend-paying stocks
Another powerful way to put your money to work for you is to invest in dividend-paying stocks. That's because they offer a double-barreled way to profit -- from dividends and stock-price appreciation. For best results, reinvest those dividends.
Your initial dollars spent on shares of dividend payers will kick out dollars to you in the form of dividends. Use that money to buy more stock in dividend payers, and those dividends can generate more dividends.
Check out the 20-year average annual returns of some familiar names in the table below, and see what a difference reinvesting dividends makes:
If you have a hefty retirement nest egg and you can keep $400,000 of it in dividend payers with an average yield of 3%, you're setting yourself up for $12,000 in annual income -- about $1,000 per month. Better still, that sum is likely to increase, as healthy and growing dividend payers increase their payouts regularly.
No. 3: Buy an annuity
Here's one more great way to put your money to work for you: Use it to buy one or more annuity -- the fixed, as opposed to the variable or indexed kind. It's like buying yourself a pension, as an annuity from a solid insurer can deliver income to you for the rest of your life, and depending on the terms you pay for, it can increase the payments to keep up with inflation and can keep paying your surviving spouse after you die.
Below are some recent annuity quotes, using recent interest rates. When interest rates are higher, quotes will be higher, as well.
It's also smart to consider a deferred annuity (sometimes known as longevity insurance), which will start to pay you at a future point. A 60-year-old man, for example, might spend $100,000 for an annuity that will start paying him $1,003 per month for the rest of his life beginning at age 70. One overall retirement income strategy to consider is buying a deferred annuity (or two) to start paying you enough to live on beginning at a certain point in the future, and then using the rest of your nest egg to support you until that point.
It's smart to review your finances regularly, to make sure you're on track saving for a comfortable retirement. Any or all of these three strategies above can help you build a more financially secure future by putting your dollars to work for you, establishing critical income streams.
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