This is one question you SHOULD be asking – How can I make more money? And, in this post, I’m going to explain how to make more money with your money.
A pop quiz: If you can grow your capital by 7% annually, how many years would it take to double your money?
What would you do if you won $50,000 playing the lottery? Well, the first thing most definitely would be dedicating a large portion of it towards taxes. That would leave you with about half. That’s not enough to make any substantial difference in the quality of your life, right? Well, right now, probably not. Ten years from now? Absolutely yes.
The Dilemma
According to a published study done at Berkeley, recipients of at least $50,000 lottery winnings are 50% more likely to file for bankruptcy in the span of two years after winning, compared to the general population. On average, people are not very conscientious and efficient in growing their wealth long-term. There is also the misconception that earned money and money won are not the same. This one also proposes the idea that people who earn $50,000 are in a far better position to grow their capital than people who won it. But, it’s actually the same. Money is money, and the skills you need to grow it are attainable, no one is born with them.
So, what is the dilemma regarding earning money, using money? It’s this; what should you invest your money in to get the best results? And this is where those lottery winners make mistakes; they are often too afraid to decide and slowly but surely, bleed their capital out.
The Safest and the Slowest Approach
Let’s go with an even smaller amount so that everyone can relate to the situation. $5,000 is the starting capital. What can you do with that in terms of investing and earning money? There are a couple of approaches.
Debt Elimination
It is estimated that the average credit card debt in America is in excess of $5,000. Simple math does the trick here;
Debt of $5,000 at an average interest rate of 16% and monthly payments of around $250 requires 24 months to settle. When you finally pay it off, it comes down to $5,854.49. So, in essence, you lost $854.49 to interest. Ever heard of an expression: money saved is money earned? Well, this is that precise case. Pay off your debt and practically earn $854.49.
The result: on your initial “investment” of $5,000, you got a 17% profit in return over the span of two years. That’s a remarkable growth.
Investing in Bonds and Stocks.
Bonds
Picking a low-risk bond and investing in it is a safe choice, especially if you allow it to mature. Bonds have an interest rate of 2.5-3% and using our sample capital, the math is pretty clear:
A two-year bond worth $5,000 and a 3% interest rate is worth $5,306.85 (after federal taxes at around 28%)
The result: on your initial investment of $5,000, you got a 6.1% profit in return over the span of two years. A decent growth with low risk.
Stocks
There are two ways of investing in the stock exchange market. You can buy stocks of individual companies and look to sell at a profit once the price moves. The other way is investing in a diversified index fund. This means instead of investing in a single stock; you actually invest into an index of stocks carefully packaged based on their strength, performance, and risk. An S&P index mutual funds steadily produced a 7% interest annually over the last decade (this is an average; last year saw an incredible 21% growth). So here is the math:
Investment of $5,000 into an S&P index at a growth rate of 7% would net you $724.50 in profit.
The result: on your initial investment of $5,000, you got a 14.5% profit in return over the span of two years. A remarkable growth with low risk.
Pop quiz answer: It would take you 10 years to double your capital at the annual growth of 7%
Alternative Short-term Approach
You can grow your money in other ways apart from investing it into the stock exchange markets and other financial mechanisms. There are many examples, but let’s focus on one of the most popular; investing in a business.
You can use your capital to create passive income by creating additional revenue streams. What that says in so many fancy words is; start a business or invest in one. With your $5,000, you can start a small business. Starting a small business definitely carries more risk than investing in the market, but it also garners a chance of getting substantially better results. Take every major company out there and look how they started; Google – started in a garage, Apple, Hewlett-Packard, Amazon – all garages, Facebook – college dorm.
Of course, comparing yourself to Steve Jobs might be a bit too much, but the principle applies none the less. The point is this; starting a small business like a sandwich shop or an online clothing store (or any other example) can really pay off big time. That’s because the value of the business is far greater than the amount of the initial investment.
Let’s say it takes 2-4 years to get back the $5,000 you initially invested in the business. Granted, you haven’t actually earned any money in terms of cash, but you have a running business that is worth somewhere between 3-50 times (very rough estimates) as much as your initial investment. The risk of failure is far greater compared to investing in long-term options and it does require more effort, but the reward is potentially immeasurably greater.
The “Best” Approach
Financially, you are best off combining all of these options. Again, using our sample capital of $5,000 here is one possible scenario;
Pay off $3,500 of your credit card debt, reducing your monthly payments from $250 to $75, leaving you with $175 free in your monthly budget.
Use the $1,000 to invest into a bond or a stock index fund at 7% growth rate (reinvesting the interest) and $75 per month as additional investment. Use the remaining $500 to start a business (online sales, a customer service of any kind, really ground level stuff) and the excess $100 a month to cover the costs until it becomes marginally profitable.
The result after 24 months;
- Your $5,000 is still available at any time on your credit card.
- Your investment account: $3,489.94
- A two-year-old business that could be really worth a lot (or not that much at all), that generates a passive income every month, allowing you to reinvest.
For more Passive Income Ideas, read this post.
Conclusion
There are plenty of options to put your money to work for you and they all boil down to risk management, realistic expectations, and smart decisions.
If you’re looking for more investment opportunities, check out this post.
Want more? Read 7 Successful Ways to Make Money.
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