Being from the Detroit area I pay extra attention to the Big 3 and their road back to financial health. I’m sure many of you have heard that GM and Ford are paying out large profit sharing checks to their employees this month. What are the employees going to do with these bonus checks? If you want to know, just pick up any local metro Detroit newspaper and they will have interviewed 10 people on what they plan to do, and then the writer will explain to you what they think you should do with the money.
It seems like every time I pickup a newspaper, a finance magazine, or read an online article about what to do with some spare cash, they suggest paying down debt and stashing the rest away in your savings account. Hey, I’m all about paying down your debt, especially the kind with high interest rates. But before you take those hundreds, or perhaps thousands of dollars and sock it away in a low interest earning savings account, consider these 5 alternatives instead:
1.) If you don’t need the money anytime soon, skip the boring money market account and CD’s, instead, consider Lending Club. I’m still a novice user, I have about $2,000 in my account, and it’s earned a 15% return for me this past year. Since joining a year ago, I’ve yet to experience a loan default either, but of course I attribute this to looking for specific attributes in each loan you purchase. I list my investment strategy in a previous article of mine. ( https://www.moneyistheroot.com/2011/02/lending-club-w…to-p2p-lending/ ).
2.) I can’t stand when I read financial articles that tell you to “invest in the stock market” or “don’t invest in the stock market”. The stock market is such a general term. I’m not telling you to take all of your savings and invest in Apple, I’m telling you to consider the risk involved and make an informed decision. Owning one type of stock will not diversify your portfolio, but investing in one mutual fund will. Better yet, find a fund that invests in more than one industry. That way in case the automotive industry takes a nosedive again, you may have funds invested in healthcare companies as well.
3.) Dividend stocks provide a stream of income for many retirees, and let’s face it, retirees tend to prefer the safest investments they can find. This isn’t to say that there aren’t risky dividend stocks out there, I can think of many real estate investment trusts (REIT) that fell out of favor when the housing bubble burst. Now if you ignore the sin factor (unfortunately my conscience won’t let me), consider that of the 3 largest U.S. cigarette makers, only one of them pays a dividend below 6.7%. That’s a built in 6.7% without even considering actual gains from the stock price itself. Personally I prefer ADP and JNJ, I’m heavily invested in both, and it has paid off well for me so far. If your brokerage offers dividend reinvestment plans (DRIP), then you can reinvest those payments back into the stock without a transaction fee. Many stocks will allow you to purchase fractional shares, which is helpful when you are first starting out.
4.) Money market accounts aren’t as attractive ways of earning interest as the above options, however, they tend to beat savings accounts, while offering the same ease of liquidity and lower risk. In fact, I don’t even have a savings account, I use a money market instead. The APR is 1% higher than the savings account offers at my bank, and the money is just as accessible. The only difference I have found so far is that I am limited to 6 withdrawals in a month before I am charged a fee. If we are using these accounts with an intent on saving, then that’s probably not a bad feature to have.
5.) As I explained earlier, I’m all for paying down your debt. Don’t go stashing money in your savings so you can earn 1% APR, all while paying 20% APR on your credit cards. Pay down that debt first! One thing I would consider, is whether or not you have one of those “no interest” cards. If you have a balance, but you are free of interest for 6 months, 12 months, 24 months, then invest that money until you need the balance paid off. Once the balance comes due, make sure you remove the principal from your investment, pay off the card balance, and keep the interest! This approach does take a certain kind of discipline, but if you have it, then it’s a good strategy.
Having money for a “rainy day” is just smart business, but don’t let inflation outpace your savings.
How about you…do you have any alternatives to the traditional savings account that you can share with us?