Interest rates on savings accounts are still meager. That means a deposit of $10,000 will only offer a slow growth, depending on the current interest rate, if you keep the money in a savings account. But, of course, banks give you incentives to save, and if you add a monthly deposit to the $10,000, you can expect to earn a higher interest rate. However, interest rates are currently low. With rising inflation rates, your hard-earned savings can often make you more money if allocated differently. Here are five safe ways to use your cash to make more money.
Profit By Paying Your Debt Down
Paying your debt down is quite a profitable way to invest your $10,000. Let’s look at an example to show you how: if in an investment portfolio, your money can earn you a 5% return, but you are paying 23% for a credit card debt, then you are losing 18%.
Therefore, paying off the debt on your card first helps you to save the difference in interest payments. Once paid, you can then invest the remaining funds.
Save More By Increasing Your Mortgage Payments
Some types of interest are tax-deductible (mortgage interest on the first $750,000), while others aren’t (credit card debt). You need to consider your options here to see how much money you can save if you increase your mortgage payments.
If you have a 30-year fixed mortgage at 6%, for $200,00 with 20 years left, then a $100 increase on your monthly payment can save you $19,000 over the loan’s life, and you will repay it three years earlier.
However, suppose you pay a 5% mortgage interest rate and fall in the 28% income tax bracket. In that case, you only pay 3.6% in mortgage interest after taxes. Therefore, if you find an investment that gives you a higher return, you may prefer to invest the money there rather than in your mortgage.
Enhance Your Retirement Planning
Using your $10,000 to increase your 401(k) savings makes excellent sense, especially if your employer matches contributions. However, if you aren’t contributing an amount that fits your employer’s contributions, you lose part of your tax-free contributions. Therefore, consider contributing the maximum amount to boost your retirement savings and lower your income before tax.
The limit of your contribution to your 401(k) increased this year to $20,500 from $19,500. If you are over 50, the additional catch-up means you can put away $27,000, an increase from $26,000.
Consider an Individual Retirement Account (IRA)
Furthermore, even if you have contributed fully to your 401(k), you can add up to $6,000 into a Roth IRA every year. If you are over 50, the amount increases to $7,000 – when withdrawn after retirement, the money is tax-free.
Remember, there are two types of IRAs, and they do differ. A traditional IRA does allow you to write off contributions annually, but these are taxed when withdrawn at retirement.
Other Investment Options
There are several other investment options for getting a good return on $10,000 if you have already met your goals of reducing your debt and increasing your retirement accounts. However, as we currently see, these investments come with risks linked to how the financial markets will perform due to political or economic factors.
Furthermore, converting your investment into cash can sometimes take longer than anticipated – known as liquidity risk.
Stocks – The stock market is a riskier investment than any of the above but has traditionally provided a good return on investment over time. One example is the S&P 500, which has yielded an average return of 10.49% since its inception in 1926.
Mutual Funds and ETFs – For those that prefer diversification, these forms of investing allow you to invest in different securities through mutual fund companies. A long-term strategy is best for these funds that offer returns that closely mimic the market returns of the specific index to which they are linked.
Bonds – The three main types of bonds are corporate, municipal, and treasury, and they have different ratings based on the credibility of their issuer. As a result, bond prices fall when interest rates rise, and you will make less if you sell them before maturity.
There are several things to consider when considering investing $10,000. First, carefully consider your debts, type of investment risk, goals, and tax implications, and evaluate the fees of any investments. Paying debt off first has the most benefits than savings accounts, but you also need to consider your financial security. Your investment efforts should enhance your savings, so research, calculate and compare before taking the next step.