We’ve all heard the saying, it takes money to make money. While the sentiment is true, the good thing is that you don’t always need much money to start the process. It could be as little as $1 in some cases. So, how can you turn money into more money, especially when you may be starting out with very little? What we’re really asking with this question is how can we best put our money to work? Because when your money’s working for you, it’s making you more money.
There are 3 basic ways you can turn your money into more money:
- Invest in yourself
- Invest in the stock market
- Lend money
1. Invest in yourself
There are so many ways you can choose to invest in yourself. You may opt to go back to school to increase your expertise and advance your career. In doing so, you could be eligible for a promotion or higher paid position. Or perhaps you may pursue education in order to transition to an entirely different career field which offers better compensation.
If you are seeking to change careers, you might also invest in services that will help you achieve that goal. Utilizing the services of professional resume builders, headhunters, and career coaches alike can help you achieve your professional and financial goals and corresponding salary.
Start a business
Another way to invest in yourself is to start a business. Before you skip past this section thinking:
- I can’t do that..
- I have no idea what business I would start…
- I’m not smart enough…
- I don’t have enough money…
There are so many types of businesses you could begin. You could develop a product, run a website, write a book, offer services, be a consultant… The opportunity is endless if you can find a way to provide value for a profit. It’s important to remember that you don’t need to do it all on your own, and you don’t need to be a business genius.
For some perspective, the 2020 US population was just over 331 million. The chances that you know someone who owns, works at, or has invested in the creation of a small business is much higher than you might think. The opportunity is out there if you’re willing to grab it.
Proactively evaluate your return on investment
The key is to make sure that however you choose to invest in yourself, that you’ll be able to realize your anticipated return on investment. All investments come with a degree of risk, even when the investment is in yourself. So it’s important to calculate your expected costs and anticipated returns.
For example, let’s think about a scenario where you choose to go back to school in order to advance your career. Let’s say you’re 28 years old in a mid-level job and the program you want to enroll in will cost you $30,000. In doing your research, you’ve found out that you’ll be eligible for a promotion at work which will come with a $10,000 per year pay raise.
On the surface, that may seem like an expensive educational program that won’t get you that big of a raise. And you’ll probably quickly jump to the fact that it will take you 3 years of said raise to pay for your education. However, in the long term, let’s calculate what that return on investment will really look like:
- Your investment in education = $30,000
- It will take you 3 years of your raise to pay off your educational investment ($10,000 x 3 = $30,000)
- Expected age of retirement = 65
- Working years remaining after paying for education: 65 – 28 – 3 = 34
- Net return on investment: 34 working years x $10,000 annual raise = $340,000
Of course this math comes with some assumptions:
- That it’s a guaranteed promotion and raise once you finish your program
- You aren’t incurring additional costs (i.e. interest on a loan) to complete your education
- That you’ll make $10,000 more than your current salary in all of your working years until retirement at 65
Any deviation from those assumptions will at least slightly impact your return on investment. However, making a total of $340,000 on an investment of $30,000 is a great annualized return of 7.4%.
2. Invest in the stock market
Another common way to turn money into more money is by investing it in the stock market. You can do this by investing in individual stocks, or with groups of stocks like ETFs. As we already mentioned in the first section – all types of investments come with a degree of risk and investing in the stock market is no exception.
However, on a long enough time scale, with proper diversification, and by making smart decisions, investing in the stock market can be one of the most effective ways to grow your money. A common benchmark and frame of reference are the historical returns associated with the S&P 500. Since its inception, the S&P 500 has averaged annual historical returns of 10% since 1926. That’s equivalent to about 7% adjusted for inflation.
There are a variety of accounts that you can invest through, such as IRAs, 401(k)s, and TSPs. All of these come with varying advantages and disadvantages. Whether you are investing for the dividend payout, or to simply grow your portfolio over time, you have a plethora of options to do so. A big bonus of investing through an employer-matched 401(k) is the opportunity to not only put your money to work, but also put your free employer-matched contributions to work.
Fortunately, many IRA investment platforms such as M1 Finance, Betterment, and Acorns allow you to buy fractional shares – some for as little as a few dollars. What are fractional shares? They are pieces of a share. That is incredibly beneficial for investors, especially those who may not have much capital to invest with. Fractional shares allow you to purchase pieces of shares that you may not be able to afford had you only the option of purchasing entire shares.
For example, AMZN (Amazon) stock was selling at $3,263.38 per share at the close of market on January 20, 2021. For many people, that would simply not be an affordable option. Fractional shares allow you to invest in pieces of shares for a fraction of the price.
3. Lend money
The third and final basic way to turn money into more money is through lending money. With the recent and growing trend of microloans, there are an increasing number of ways for you to make money by lending even very small amounts of money.
Perhaps lending money to make money seems counterintuitive. But we’re not talking about lending an obscure family member some money which you never actually expect to get back. We’re talking about you taking on the role of a lender.
How does this work? Think about how it would work if you were to request a loan from a bank. If you were approved for the loan, you’d likely be required to pay interest payments on the principal amount that you’ve borrowed (i.e. the cost of the loan). The interest payments you pay on the loan is income that the bank is making off of your debt. Now, you’ll be the one acting as the bank with the ability to make interest off of someone else’s loan.
You can lend money, or buy debt, a few different ways:
- You can buy short or long term debt from the US government, state government, or local municipalities
This is typically done by purchasing bonds and treasury bills. While these types of investments don’t provide the highest returns, they do come with some significant tax advantages.
- You can also lend money to private individuals
Many platforms such as Lending Club and Prosper help connect private borrowers with private lenders. Essentially, those websites act as intermediaries. However, it’s important to make sure you’re aware of the specific terms associated with each transaction and that you know whether or not you’re lending via a secured loan or not. Lending through an unsecured loan can be a much riskier process.
The bottom line
Remember, all types of investment come with a degree of risk. It’s important to do your research before diving into any of the aforementioned ways to turn your money into more money. However, making your money work for you is hugely advantageous. Just be sure to evaluate and consider all the risks and probable returns. Having the necessary information will help you make the right decisions in your endeavour to create wealth.
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