Albert Einstein called compound interest “the eighth wonder of the world”.
It’s not difficult to see why.
Consider the following table, in which we assume that you have just put $5,000 into an account, then left it for 20 years to accumulate interest…
|Interest Rate||Total After 20 Years|
Note how the paltry interest rates offered by most banks would result in minimal growth over time. As the interest rate starts to inch up, however, so your money grows faster and faster.
After 20 years, the difference between a 1% interest rate (offered by many banks right now) and 10% is a whopping $27,537. That’s a huge sum of money to lose out thanks to a few percent interest!
The key lesson is this: don’t assume that a tiny change in interest rate won’t make any difference to your money: it will. Even an increase of one or two percent can make an astonishing difference to how much cash you have to enjoy in retirement (or before!).
That said, while many of us have benefited from low interest rates, making mortgages more affordable than ever before, there is a darker side to this situation: most traditional savings accounts are offering an embarrassingly bad rate of interest.
So – how can you earn more interest on your savings…?
Start an Online Business
Starting a business might seem like an odd way to earn extra interest on your savings but stick with me for a minute…
While I’m not suggesting that you sink all of your life savings into starting your own business, most can be started with minimal capital and – as a result – minimal risk. What’s more, the potential returns from such a venture can be vast.
Here are just a few of the more popular (and higher grossing) opportunities at present:
I have been blogging in one form or another for over a decade now, and I have personally seen just what sort of results bloggers can generate. It’s possible to set up a blog for less than $100 as I showed in this tutorial, but if you have money to invest you can grow things far more quickly by outsourcing many elements such as article writing, link building and social media marketing.
If you want to learn more about starting your own profit-producing blog then just follow this detailed series of articles.
“FBA” stands for “fulfilled by Amazon”. In essence you source products from cheaper countries (typically China) then send them to an Amazon warehouse. From here your products can be made available to Amazon’s vast customer base. Whenever one of your products is ordered, you receive a profit while Amazon (for a fee) packages and ships the product on your behalf.
Such a business does of course require a reasonable investment in stock to begin with, but thereafter can grow rapidly. Margins of 20-30% are entirely possible, which is a lot better than the standard savings rate.
Merch is a brand new opportunity, only launched in 2016. In essence the Amazon Merch program allows you to create t-shirt designs. These are uploaded to Amazon and made available for sale to their customers. When one of your designs is ordered, Amazon print the t-shirt and ship it to the customer, while you earn a cut of the profits.
While the potential of Merch by Amazon is arguably lower than for Amazon FBA the costs to get started (and hence the risk involved) is considerably less.
Somewhere in the region of 5 years ago I commissioned a handful of ebooks to be written. They were all outsourced to ghost writers and then uploaded to Amazon’s Kindle publishing platform. Even to this day, with zero promotion in years, I still receive an income every single month for this work.
If you like to write – or are willing to pay others to write books for you – it’s entirely possible to turn a small initial investment into a sizeable ongoing business that generates a return on investment far greater than your bank.
What’s more, if you don’t want to start an online business and grow it from scratch, remember that you can always purchase established online businesses from reputable brokers like FE International or Empire Flippers. Typically available for just two years of revenue, such a property can very quickly turn a profit and produce much more generous returns than a traditional savings account might.
Peer to Peer Lending
Peer to peer lending is simple to understand – the platform in question acts as a bank, assessing people that would like to borrow money and providing the system for them to receive this money. You, as a peer to peer lender then put up your own money to fund their loans.
As you might expect, interest rates can vary wildly, depending on the risk you’re willing to shoulder and the market segment you’re targeting. Popular peer to peer platforms include Proposer and Lending Club, though if you’re willing to go a little “off piste” there are some less well-known lenders who claim to offer interest rates of up to 10% per annum.
Bondora is one network that I have invested with recently, offering an average return of 14% at the time of writing – a far more tempting opportunity than many other peer to peer networks. Sign up for free today and see what all the fuss is about.
Stock Market Investing
A second, and rather more traditional way, to earn more interest on your savings is to consider investing in the stock market.
Historically stock market investing has been seen as risky, and when it’s done wrong it can be. Betting on single companies, for example, greatly increases your risk, as does investing for only short periods of time.
Most financial experts recommend investing for the long term, in a fund which spreads your investment across hundreds and hundreds of different publicly-traded companies. While such a portfolio will still see troughs as well as peaks, historically the stock market has risen steadily over the years.
This is the philosophy that I myself am following – long-term investing in an all-market fund. If you’re also interested in such a concept then I recommend you check out Betterment for their wide range of funds and easy-to-use tools.
While many of us know someone that has made good money in property investment, the reality is that it seems to be getting ever harder to make decent returns. Combined with this, appreciate that property investment requires a very specialist group of skills and experience, together with large sums of money to get started. It may therefore be the most complex investment opportunity on this list. There is, however, a solution.
A number of crowdsourcing platforms now allow anyone to invest in property, with investments often as low as $1,000. These platforms variously lend your money as a mortgage or bridging loan to property owners and developers, or use the funds to buy into properties themselves. You, as one of the landlords, then receive a chunk of the rental income when the property has been purchased.
Lastly, don’t assume that all savings vehicles are the same. Most countries have a range of products that make sense when you consider them from the perspective of taxation. While the interest rates offered may not be quite as exciting as some of the other opportunities outlined above, the way in which you pay no tax on earnings can make them surprisingly attractive.
Whatever you do, don’t settle for the poor interest rates offered by most traditional banks at present. You’ve seen just how much an impact the interest rate you’re earning can have – even on relatively small amounts – so refuse to accept anything but a healthy interest rate and watch your savings growing that much quicker as a result.
Disclaimer: I am not an investment professional, and would advise you to seek qualified professional advice before investing your money into any of the ideas outlined above.