If you’ve got a pile of money lying around from the sale of a house or some other windfall, you might be wondering what the best thing to do with it is. There’s one simple answer to this question: don’t put it in the bank.
Of course, this answer only leads to more questions. “Why not?” and “what should I do with it instead?” are probably the most important ones.
If you have a hunk of cash sitting in a savings account, don’t worry. We’re about to break down why that might not be the best idea, and make some suggestions as to what you could be doing with it instead.
Well, not die per se, but banks are certainly not the place money thrives. Most people grow up thinking of banks as the safest place to put one’s money: they’re well protected and insured, so even if the bank your money is in gets robbed, you won’t have to worry about it.
This perception, however, comes from a time when the alternative to banking was hiding your cash in your mattress. These days there are much better places to stash your cash when you’re not using it.
It’s not like banks aren’t safe — they are. The problem with leaving money in a simple savings account is that it may not grow enough to beat inflation, which, at the end of 2022, was 6.5% in the US and 6.3% in Canada (though, historically, the inflation rate in the US averages out to about 2.2%).
While some internet banks have high-yield savings accounts that will earn up to 4% interest annually, not many banks have rates that high — in fact, the average savings account interest rate is less than 1%.
Let’s play a scenario out: in January of 2022 you put $10,000 in your online savings account with a 4% interest rate. At the end of the year, your account balance will be $10,400. However, because of inflation, that money will only be able to buy you $9,724 worth of goods and services compared to when you put it in the bank. You’ve technically lost nearly $300, and that’s not even factoring in the opportunity cost of what your money could have earned if you’d invested it properly.
Basically, putting your money in a savings account is the financial equivalent of sticking your pothos plant in the corner of a dark room. It’s not going to die, but it sure as heck won’t be growing all that much either.
Don’t worry though. There are better ways to ensure that your money keeps pace with or even outpaces inflation. Keep reading and we’ll break some of them down for you.
CD accounts are similar to high-yield savings accounts with a couple of exceptions. First, you get a slightly better rate. You could earn up to 4.5% in a CD account, which is completely unheard of in even the most generous of high-yield savings accounts.
The catch, however, is that you lose access to that money for a specified period of time (usually between six months and 5 years). The longer you give up access to your money, the higher interest rate you’ll earn.
So, if you know you won’t need the money any time soon, CDs are extremely safe investments that you can bank on giving you a predetermined return. But even at 4.5% you’re still losing to 2022 inflation, so this is probably not the best option for most people.
Bonds are (basically) IOUs given out by the government in exchange for an initial payment. A bond will mature at a date specified upon its purchase, at which point you get your initial investment back plus some interest.
What’s more, the US government has excellent credit, so you are basically guaranteed to get your money back. However, because there is little to no risk involved with purchasing bonds, they tend to have relatively low interest rates. (Well, not compared to savings account interest rates, but in the grand scheme of things it’s nothing to write home about.)
Interest rates on government bonds change all the time depending on all sorts of factors, however if you purchase an I bond from the US government between November 2022 and April 2023, it would come with an interest rate of 6.89% (Treasurydirect.gov).
Now, part of that interest rate changes every 6 months or so to account for inflation (there’s some complicated math involved in how they calculate the bond interest rate bi-annually), but for the most part you can expect these kinds of bonds to outpace inflation somewhat. They won’t be the most lucrative investment you can make, but if your primary concern is ensuring that you definitely grow your money ahead of inflation, they’re one of the safest bets you can make.
You don’t have to be a pirate to own gold, believe it or not. In fact, historically, gold has been one of the safest investments a person can make. According to Statista.com, gold has appreciated in value nearly 8% over the past 20 years, well ahead of inflation.
While you could get into the gold-owning game the old fashioned way (i.e. buying coins and bars made of gold and keeping them in your attic or a safe-deposit box at the bank), there are easier ways to do it in the 21st century. Just like some apps allow you to invest in the stock market and cryptocurrencies right on your smartphone, you can find services that allow you to buy gold in very similar ways.
Even better than gold, however, is to buy into commodity funds. These funds invest in a broad spectrum of raw materials (e.g. oil and natural gas), primary agricultural products (e.g. wheat or corn), and precious metals (e.g. gold and silver).
Because commodity funds are diversified, they are not as vulnerable to sudden shifts in the market, and so they tend to do better over time compared to prices of individual material that may be included in such funds. Over the past 20 years, commodity funds have appreciated approximately 8.3% (Statista).
Despite the prevalent feeling that “playing” the stock market is akin to betting all your money at a casino, investing in stocks is far and above the best way to ensure that your money grows considerably ahead of inflation.
Of course, that certainty depends on you investing your money properly (i.e. NOT spending $10,000 on Gamestop stocks). We don’t have time to get into the nitty gritty of investing advice here, so you should definitely consult a professional if you plan on investing properly.
How much you can expect your money to grow in the stock market of course depends on which market you invest in. The three “best” markets in terms of average historical growth rate (according to Statista.com) are Emerging Market stocks (6.32%), the European, Australasia, and Far East markets (9.23%), and the US market (10.21%).
All of these markets tend to grow at a pace well above that of inflation, so a well-diversified investment portfolio in and across these markets is a great way to grow wealth without risking too much).
As lucrative as the investments we’ve discussed can be over time, none of them are going to appreciate nearly as fast as high-interest debt will grow if you keep it around. The balance on a credit card, for example, will grow at an annual rate of between 19 and 22%, which is about double the rate at which you can expect your stock investment to grow in a good year.
The average American has a little over $5,000 in credit card debt. Making only minimum payments, this is not only going to take 10 years to erase, but will end up costing an additional $1,600 in interest and fees.
So, if you have any sort of outstanding credit card balance (or any other form of high-interest loan), you might want to pay that off before you consider making long-term investments.
Here’s a summary of the various historical growth rates associated with the investment options we discussed above:
|High-Yield Savings Account||4%|
It’s also worth noting that the inflation rate as of December, 2022 was 6.5% in the US (though the historical average is closer to 2.2%). When considering where to invest, you want to be sure that your money is going to outpace inflation.
More importantly, the average credit card interest rate is around 20%. So, if you have any outstanding credit card debt, it’s probably a good idea to pay that off before you invest your money elsewhere.
Finally, before you make any decisions about what to do with a large sum of money, you should consult a financial professional. No amount of blog-reading is going to give you the experience and know-how that they will have, and they’ll be able to give you advice that will allow you to invest in whichever way you want: high risk/high reward or slow, steady growth.