Let me ask you something. Do you pay bills?
Of course you do. We all have bills. They’re a simple fact of life. But let me ask you another question. Do you have bills that cost interest?
- Credit card bills
- Student loans
- Car loans
I do. I have a loan with 4% interest, and another with 3.5% interest. The media tells me those are “good” rates, that I’m locking things in before they go up.
But you know what? I’m not earning interest in other areas. Certainly not more than three or four percent, if the numbers in my retirement account are to be believed.
And yet, I’d like my money to work for me.
The theory is simple. You have x dollars, and you spend something less than x (hopefully) on your various things. That’s fine, but the only way to get out of the cycle of trading your time for money and your money for things to finance is to start making your money work for you.
There are several ways to approach this:
- Take a look at all the bills you pay which charge you interest, simply for the privilege of having a payment plan
- What’s the highest amount of interest among them? If it’s more than 10%, yikes!
- Paying off high-interest loans gives you the very same benefit as investing in something that gives you that level of return. Think of it that way. The only guaranteed return you’ll ever get is paying off something you owe.
- The stock market returns are estimated to stay steady between 6 and 8%, so prioritize investing over paying off something between 3-4%.
- The inflation rate is currently 1.1%, so you’re not doing yourself any favors by keeping your money in one of those “high interest!” savings accounts, which are giving returns of less than 1%, which makes putting money in them only slightly better than keeping your money under your mattress.
Break the cycle! Stop financing things. Make money work for you.
Here are some ideas on how to make money work for you:
- Max out your IRA ($5500 a year)
- Contribute as much as you can to your company’s 401(k) if you have one. If they offer matching, then make sure you’re putting away the maximum you can that will be a match (somewhere like 6% of your salary, but check your employee handbook).
- Start looking into investing options outside of retirement. I didn’t know this until I started looking at it, but you can open the same kind of funds outside retirement as you can inside retirement.
- Look into alternative forms of investing. There are peer-to-peer lending services where you decide who gets to use your money. They pay you back, at a higher rate than you’d get from your savings account, and you lend money at a better rate than they can get from their credit card company.
Once you see how your money can grow when you start letting it work for you, you’ll be well on your way to being financially sound.
And that’s a great place to be.
Image by cohdra