When you’re young and just beginning to earn money, developing a savings plan is key to future wealth. Let’s say you’ve developed a great savings plan and have $15,000 dollars in your savings account, now what? While I can’t stress enough how important it is to save money, it’s equally important to utilize your saved money.
Related: 7 Ways To Save Money Each Month
Don’t Let Your Money Stagnate In A Savings Account
Money that is sitting in a savings account will be earning extremely low interest, try 0.25%. At that rate, you will earn very little money off of your saved money over time. Chances are the rate of inflation will actually make the money in your savings account even less valuable, as most savings account interest rates don’t even keep up with inflation.
Instead of allowing your saved money to stagnate in a savings account, you need to make your money work for you. Here are a few ways to do that:
Invest in Stocks
The concept of putting your hard earned money in the stock market may scare you at first. People always tell stories of stock market crashes that caused them to lose all of their money, but this is overdramatic. While it is true that a stock market crash can cause you to lose all of your money if the company you invest in goes out of business, this can be prevented by investing wisely to minimize your risks.
When investing in stocks do not invest in penny stocks unless you are willing to lose all of your money. Penny stocks may have a potentially high return in a short time, but they have an equally high risk. Choosing a penny stock that is going to sky rocket and timing the increase is like finding a needle in a haystack.
Instead, invest in stable companies with proven business models. Think Disney, Apple, Microsoft, and Google. It’s highly unlikely any of these companies are going to skyrocket overnight, buy they can produce solid returns in the long run, not to mention dividends in the meantime.
To give you an example of the power of investing in the stock market, a $1,000 investment in Disney 5 years ago would be worth around $2,850 today excluding dividends.
Related: Introduction To Stock Investing
Invest In Real Estate
Depending on where you live, $15,000 may or may not be enough to begin investing in real estate. If you have good credit and a stable earning history, you can typically get a loan with only 3.5% down. With $15,000 in the bank you could purchase a home that is priced around $150,000 and pay a $5,250 down payment plus about $5,000 in closing costs (this can vary) for a total cost of $10,250. This leaves you with $4,750 in the bank for any financial emergencies.
A quick side note regarding emergency funds: Your emergency fund should be enough to cover at least 3 months of living expenses. Before making the commitment to spend a large chunk of your savings on a home, make sure you will still have enough in your savings account for unexpected expenses.
Investing in real estate can be as simple as purchasing a home and living in it. It’s considered an investment because in time homes tend to increase in value. Some would argue that a home you live in is not an investment, but a hedge against inflation. Either way, buying a home can be a way to protect your money from inflation.
Another benefit to owning is that in many real estate markets the monthly cost to own a home is slightly cheaper than the monthly cost to rent that same home, this is especially true in very hot rental markets. In comparing the cost of renting vs. owning, as a general rule of thumb, owning a home becomes cheaper than renting after you have lived there about 3 years, but this can vary by market.
Related: Renting Vs Owning A Home
Here’s something else to think about. Let’s say you purchase a home then 5 years later you decide to upgrade and purchase a new home. If your budget allows it, consider keeping your former home as a rental property, which can generate income for you once it’s paid off. If it’s not paid off, the rent can cover the payment in the meantime. By doing this you can create a stable supplemental income in the future.
Invest In A Roth IRA
For young people, a Roth IRA is a great and safe way to invest your money. A Roth IRA is a type of retirement account in which you pay taxes on the money you put in, but don’t pay taxes on the money you take out in the future. This makes a lot of sense if you think there is a good chance you will be in a higher tax bracket at the time you plan to start withdrawing money.
So what kind of annual return can you expect? The money you invest in a Roth IRA doesn’t stagnate like it does in a savings account, but will likely average a 7% return per year over time.
There are limits on who can contribute to a Roth IRA. First off, you have to have earned income to contribute to a Roth IRA. Therefore if you simply have money in the bank but no earned income from a job, you cannot contribute.
As of 2016, the maximum yearly contribution if you are single or head of household is $5,500 and your income has to be less than $117,000. If you are married and filing jointly your combined income must be less than $184,000. These income limits tend to go up every year.
One perk of a Roth IRA is you can withdraw your contributions (not your earnings) tax-free at anytime without penalty. To withdraw your earnings you must have had the account for at least five years and be 59 1/2 years of age or older. One exception to the rule is you can use up to $10,000 of your earnings and contributions both tax and penalty free to purchase your first home, assuming you have had the account for at least five years.
Related: Invest Now For Big Returns Later