Make Your Money Work: Beyond Bank Savings

Don't let your money sleep in the bank – start making it work harder for you. With inflation eating into the value of your savings, it's important to invest your money to make it grow, rather than letting it deplete in a low-interest bank account. While it's important to have an emergency fund to cover 3-6 months' worth of expenses, there are smarter investing options to make your money work for your future. From investing in stocks, bonds, and mutual funds to buying properties to lease, there are various passive income sources that can help you build wealth and achieve financial freedom. So, don't wait – start planning to create a passive income stream and make your money work for you!

Money in savings accounts loses value over time

Money in savings accounts can lose value over time due to inflation. Inflation refers to the decrease in the value of money over the long term, causing an unexpected increase in prices. As a result, idle cash that does not generate a sufficient return can lose value.

For example, consider a savings account with an interest rate of 4%. In this case, a deposit of ₹1 lakh would yield ₹4,000 in interest. However, with an inflation rate of 6.67%, the purchasing power of that ₹1 lakh has decreased, and it would now be worth ₹6,670. This results in a loss of ₹2,670, demonstrating how money can lose value over time in a savings account.

To avoid this loss, individuals should consider investing their money in various options such as fixed deposits, mutual funds, or gold. These alternatives can help maintain or increase the value of your money by providing higher returns or protecting against inflation.

Additionally, it is recommended to keep enough money in your bank account to cover 3-6 months' worth of expenses. Anything beyond that can be invested in liquid funds, which offer better returns than a typical savings account while still providing easy access to funds.

In summary, letting your money remain idle in a savings account can result in a loss of value due to inflation. To protect and increase your wealth, it is essential to explore alternative investment options and make your money work harder for you.

Consider passive income sources

Passive income is money earned from sources other than a traditional job, requiring little time or effort. Passive income sources can be a great way to generate extra cash flow, especially if you're running a side hustle or trying to get some extra cash each month. It can also be a good strategy if you're worried about saving enough for your retirement.

• Invest in a high-yield CD or savings account: Investing in a high-yield certificate of deposit (CD) or savings account at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country.
• Set up an annuity: Annuities can provide a reliable income stream. With a typical annuity, you make payments to an insurance company, which will provide you with a stream of income in the future. Annuities can be structured in various ways, such as immediate or delayed payouts, fixed or variable returns, and for a set period or a lifetime.
• Peer-to-peer lending: Peer-to-peer lending platforms allow individuals to lend money to others in exchange for interest payments. The returns depend on the risk level of the loans, and by diversifying your lending portfolio, you can minimize the impact of defaults.
• Buy crowdfunded real estate: Crowdfunding platforms allow you to invest in preselected real estate deals without the heavy lifting of management, repairs, and handling tenants. You can choose to invest in equity or debt, depending on your risk tolerance.
• Rent out your home short-term: If you're going away for an extended period or have a spare room, consider listing your space on websites like Airbnb or Vrbo. This can provide a steady income stream with minimal effort, especially if you rent to long-term tenants.
• Affiliate marketing: Website owners, social media influencers, or bloggers can promote a third-party product or service by including a link to it on their site or social media account. When a visitor clicks on the link and makes a purchase, the site owner earns a commission.
• Sell photography online: You can license your photos to stock photo websites or platforms like Getty Images, Shutterstock, or Alamy, and earn royalties each time someone uses your photo.
• Create a blog or YouTube channel: Become an expert in a specific topic or niche, build out content, and draw an audience. You can then generate income through ads, sponsors, or affiliate marketing.
• Buy a local business: Buying an existing local business can provide an opportunity to generate cash flow through an established company. You may even be able to hire a manager to run it for you while you make only the biggest decisions.
• Rent out a parking space: If you have an unused parking space, especially in a high-demand area, you can trade that spot for some extra cash.

Develop an action plan

• Assess your finances: Take an honest look at your financial situation and identify areas where you can make changes. Understand your income, expenses, and savings.
• Set clear goals: Determine your short-term and long-term financial goals. For example, you may want to save for an emergency fund, pay off debt, or invest in retirement.
• Create a budget: Allocate your income across your expenses and goals. Prioritize essential expenses, such as rent or mortgage, utilities, and groceries. Then, allocate funds for non-essential expenses, such as entertainment and leisure. Ensure you set aside money each month for your financial goals.
• Reduce unnecessary spending: Identify areas where you can cut back on spending. For example, you may want to reduce dining out or subscription services you don't use frequently.
• Increase your income: Consider ways to bring in more money. This could include asking for a raise, taking on a side hustle, or selling unwanted items.
• Build an emergency fund: Aim to save enough to cover at least three months' worth of essential expenses. This will provide a safety net in case of unexpected costs or financial setbacks.
• Pay off high-interest debt: Make it a priority to pay off any debt with high interest rates, such as credit cards. This will reduce the amount of money you pay in interest over time.
• Invest for the long term: Research and consider various investment options, such as stocks, bonds, mutual funds, or real estate. Diversifying your investments can help balance risk and increase potential returns.
• Save for retirement: If your employer offers a 401(k) plan or similar retirement savings account, contribute as much as you can. Take advantage of any employer matching programs. If you don't have access to an employer-sponsored plan, consider opening an Individual Retirement Account (IRA).
• Seek professional advice: Consult a financial advisor or planner to review your plan and provide personalized recommendations. They can help you optimize your investments, tax strategies, and overall financial health.

Consult a financial advisor

Consulting a financial advisor can be an excellent way to make your money work harder for you. Financial advisors can help you with a wide range of services, including savings goals, budgeting, retirement planning, and estate planning. Here are some key considerations when consulting a financial advisor:

Identify Your Financial Needs

Before meeting with a financial advisor, reflect on your financial goals and the specific areas where you need guidance. This may include personal finance, debt management, investing, tax strategy, retirement planning, or estate planning. Identifying your needs will help you find an advisor who aligns with your goals and can offer specialised advice.

Understand Different Types of Financial Advisors

Financial advisors go by various titles, such as investment advisors, financial planners, or portfolio managers. When choosing an advisor, look for credentials such as Certified Financial Planner (CFP) or Registered Investment Advisors (RIA), as these professionals are bound by a fiduciary duty, meaning they are obligated to act in your best interest.

Choose the Right Service Type

Financial advisors offer their services through different channels, including online platforms, traditional in-person meetings, or a combination of both. Online financial advisors, including robo-advisors, tend to be more affordable and suitable for basic investment needs. In contrast, traditional in-person advisors often provide more specialised and comprehensive services but may come with higher costs.

Evaluate Credentials and Background

When selecting a financial advisor, thoroughly vet their credentials and experience. Check for relevant certifications, such as CFP or RIA, and verify their background by reviewing their Form ADV and FINRA's BrokerCheck website for any disciplinary issues. This ensures that you are working with a qualified and trustworthy professional.

Discuss Fees and Compensation

Financial advisors have different fee structures, so understanding their compensation method is crucial. Some advisors charge a percentage of your assets under management, while others use a flat fee, hourly rate, or retainer. Be sure to ask about potential conflicts of interest, such as commissions earned from selling certain financial products.

Ask the Right Questions

When meeting with a potential financial advisor, come prepared with a list of questions. Ask about their fiduciary status, compensation structure, financial planning approach, available services, client profile, account minimums, and meeting frequency. Ensure that their offerings align with your financial goals and that you are comfortable with their responses.

By following these steps and choosing a qualified financial advisor, you can gain valuable insights and guidance to make your money work harder and help you achieve your financial aspirations.

Start investing for the long term

It is important to invest for the long term to secure your financial future. Leaving your money in a savings account can give a false sense of security, as it is always available to spend and is not earning much interest. In fact, with inflation, the real value of your money is falling rather than growing.

One option is to invest in gold, which has the ability to keep pace with inflation over a period of 5-7 years. However, gold has no real income of its own, so it is not a desirable long-term investment. A better option is to invest in stocks, bonds, or mutual funds, which can provide a good source of passive income.

When investing for the long term, it is important to have a plan and to understand your needs. Ask yourself how much money you can put aside now and how much you can add to it each month. Be aware that long-term investments typically need to be left to compound or grow for at least 10-15 years to deliver value.

If you are unsure where to start, consider meeting with a financial advisor to help you develop a plan that is right for you. They can also help you understand the different types of investments and the level of risk involved.

By investing wisely, you can make your money work harder for you and achieve your financial goals.

Frequently asked questions