If you’ve saved some money by spending less than you earn, you may be wondering what you should do with it.
Well you could spend it.
But, why not instead, make some money off of that money.
There are 4 basic ways to make money off of your money:
- Invest it in yourself to earn more money
- Start your own company
- Invest in another company or group of companies
- Lend your money to a company or someone else
Each way is different and involves different types of risk.
Still, you can also grow your wealth through the four basic ways to achieve a return on your money.
Invest in Yourself
When you invest in yourself, you cannot take away those skills or knowledge.
The worst that can happen is that you learn a skill and it becomes outdated or obsolete.
But, if you learn the right skills or attain the right knowledge you may be able unlock further earnings potential.
Does you current employer offer pay raises or bonuses for certification or learning?
Do you need to learn something new to take the next step in your career?
Are you thinking about pivoting to a new field with higher earnings potential?
There are plenty of different ways that you can invest in yourself to increase your earnings potential.
If you have some extra money, do some research into how you might be able to advance your career and earn more money.
Compared to the investment opportunities, this may have the highest return.
If you invest $20,000 to earn just $5,000 more a year for the next 30 years, that’s an extra $150,000.
That translates into a 650% return or a 7% average annual return.
And, that’s a pretty conservative example.
There may not necessarily be opportunities to earn more money by investing in yourself.
But, if there are opportunities, you should at least do the research of how much it might cost and how much more you may make in the future.
Invest in Your Own Company
If you have an entrepreneurial spirit, you may want to invest in your own business.
While there are businesses that don’t require much money to start, you’ll likely still need some money.
Maybe you want to quit your job to start the new business.
You’ll need some money to cover your basic expenses until you can get the business to produce a profit.
But, starting your own company can also have huge returns if successful.
While it is definitely more risky to start your business than to learn a new skill, the returns are also likely much greater too.
It’s actually quite common to start your own business to create another revenue stream.
While people may not create a business entity, investing in real estate is essentially starting your own business.
You own the assets (the property) that you are either renting or improving and selling.
There is a decent population of people who’ve simply built wealth through buying homes and renting them out to other people.
Make an Equity Investment in a Company or Group of Companies
One of the easiest ways to invest your money is through buying stock of public companies.
It has also been historically reliable for providing a solid average return of around 7-10% annually before inflation.
All you have to do is open an account at a brokerage firm and buy some stock of a
What’s even better, there are accounts and plans that have tax-benefits like the 401(k) plan or Individual Retirement Accounts.
You can use these accounts to pay less taxes now or pay less taxes later.
When you buy s
You can get a return from the company by the value appreciating or through a dividend.
Essentially, if a company grows its revenues and net income or even if people just think it’s worth more, the value of your stock appreciates.
You bought it for $100 and now if you sold it, you could sell it for $110.
The same thing happens with ETFs which track indices or groups of companies.
You may also receive a dividend from the company which is typically a cash payout from the company.
But wait, there’s more.
You can also invest in private companies!
Does your friend have a company and he is looking for outside investment?
Have you been presented with a start-up opportunity looking for an equity investment?
These are private companies but the investment is similar.
The biggest difference is that you can’t just go sell your stake in the company as you would in the public markets.
Additionally, if you are investing in a brand new business there may be much more risk associated with the investment.
Still, there are plenty of companies and even entire groups of companies that you can invest in today.
Lend Your Money
You’re probably familiar with taking out debt to fund your purchases like a house or higher-education.
You can also lend your money out too.
And, there are so many ways to lend out your money.
Companies need to borrow money.
Governments borrow money.
You can even lend to other people now through peer-to-peer lending.
Unless you have a lot of money, you’re probably not directly lending to companies.
But, that doesn’t mean that you can’t go out and buy debt investments in the public markets.
Just like the stock market, debt is traded between parties.
When you lend out money it is with the assumption that you’ll be paid back plus interest.
Unless the debt is short-term, the company will typically pay out interest payments over the course of the year.
You can also lend directly to the United States through treasury bills and bonds.
Through treasurydirect.gov you can lend directly to the United States.
You can go on and select the term of the debt investment like 6 months, 1 year, or even longer.
You either pay the amount set at the auction or you can set a bid price.
For shorter-term debt, you invest one amount and paid a larger amount like paying $99.50 and receiving $100 in a few weeks.
For longer-term debt you can either do the same as the shorter-term debt or receive interest payments.
One of the benefits of investing in government debt is that there are some tax benefits.
Treasury bills and bonds are exempt from state and local taxes.
And, debt to city and state governments may qualify to be exempt from federal, state and local taxes.
Finally, there have been a growing number of websites that allow you to lend to other people.
Websites like lendingclub.com and prosper.com offer the opportunity to lend your money out to your peers.
Lending out your money tends to be less risky than making equity investments or starting your own company.
One caveat is that peer-to-peer lending can be more risky if the loans are unsecured.
Still, the less-risky types of lending can be a great way of making some money off your money with lower risk.
Even better, you can invest in groups of debt through ETFs and mutual funds for corporate, municipal, and country debt.
Or, in the case of peer-to-peer lending, there are strategies that spread your investment out across a number of different loans.
Bonus – Pay Off Debt
So, paying off debt isn’t really making money off of your money.
This is because when you invest your money, there is a hope that you’ll make your money back as well as a return.
When you pay off debt it’s more like saving money.
But, it is still a way for you to save your future self some money.
When you pay off a portion of debt, you know longer have to pay interest on that portion of the debt.
So, if you pay off $1,000 on a 7% loan, you’ve saved yourself roughly $70 bucks over the next year.
You don’t get that $1,000 back because you already spent it but you do save yourself some money.
Final Thoughts
If you want to build wealth, you are going to figure out how to make money off of your money.
The basic ways of making money with your money include investing your money or lending your money.
You can invest your money in yourself, your company or even someone else’s company.
With lending, you can lend your money to a company, someone else or even a country or local municipality.
But, there are risks involved in all of these methods.
Do your research before you make a commitment.
If you make the right decisions, you’ll be building your wealth towards accomplishing your financial goals.
