As a child, your parents probably drilled it into you that money doesn't grow on trees. And while there's a lot of truth to that statement, the fact of the matter is that if you're smart with your money, it might multiply before your eyes. Here are three ways to make that happen.
1. Put it in the bank
The benefit of sticking your money in the bank is that your principal deposits are FDIC-insured for up to $250,000 per person. And while most checking accounts today don't pay much, if any, interest, savings accounts most certainly do. But don't limit yourself to a traditional brick-and-mortar bank. Some of the best interest rates on savings accounts can be found online. There are numerous online accounts, in fact, that are, as of this writing, paying more than a 2% APY, which is actually pretty good in today's environment.
If you're looking for an even higher return on your money, look at sticking your cash in a certificate of deposit, or CD. The only catch involved is that you'll need to commit to tying up your cash for a certain period of time, or otherwise risk a modest penalty (generally, a few months of interest). Keep in mind that the longer you're willing to lock your money away, the higher a CD rate you can expect. For example, as of this writing, you can score a 3.10% APY on a minimum deposit of just $2,000. You can check out these high-paying CDs to explore more options.
2. Buy bonds
Bonds work similarly to CDs in that you invest a certain amount of money, collect interest on that amount, and then get to reclaim your principal once the term of your investment ends. The primary difference is that whereas CDs are FDIC-insured, bonds are not, which means you run the risk of losing out on principal if you buy bonds from a company that doesn't make good on its obligations.
The upside of buying bonds, however, is that you'll generally collect a lot more interest than you will with a CD. And while there is some risk involved, bonds are generally considered a much safer investment than stocks.
Bond interest is paid semiannually, which means you can look forward to a steady stream of income when you buy bonds. And while you're technically locking yourself into a specific term when you invest in bonds, if the market is strong, you can always sell them during that term without penalty if you decide you want to put your money elsewhere.
3. Invest in stocks
Though stocks are known to be far more volatile than bonds, they also tend to deliver much higher returns. And that could be crucial in growing your wealth.
Imagine you have $5,000 at your disposal, and you choose to invest it in stocks over a 10-year period. Let's also imagine that during that time, the stock market delivers an average annual 7% return -- that's a few percentage points below its historical average, but it never hurts to be a little conservative. After a decade, you'd wind up with $9,835.
A bond portfolio, on the other hand, might deliver half that return, leaving you with $7,053. Now over a 10-year period, that's not a huge difference. But over a 30-period, you'd be looking at $24,000 difference, which is far more substantial.
Keep in mind that if you load up on dividend stocks, you'll receive quarterly income similar to the semiannual interest payments you'd get from bonds. Though dividends aren't guaranteed, companies with a strong history of paying them tend to uphold that practice.
Of course, these are just a few things you can do to make your money work for you. You can also invest in real estate by buying a property you hope will appreciate in value over time. That sort of investment, however, might require more hands-on work, so if you're looking to do the least amount of legwork, a savings account or CD will best serve your needs. On the other hand, if you're willing to do a modest yet reasonable amount of research, a mix of bonds and stocks might really serve you well in the long run.
The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.