If you are like many Americans, you earn a decent income, yet may never feel rich. It is not enough to work hard for your money—your money also has to work hard for you. No matter how your income grows, building wealth requires investments. Here are four good options.
Real Estate
Like many American families, your primary residence is likely your most valuable asset, but you do not need to stop there. Real estate is often a smart investment. There are drawbacks: It comes with no guarantees, as the housing market crash of 2008 illustrates. Additionally, there can be a high cost of entry into the real estate market.
However, if you have money to use as down payment, and a favorable credit rating that will secure a low interest rate, real estate investing may be for you. You can purchase foreclosure and short sale properties to fix up and resell at higher prices. This is called flipping, and can be quite profitable, especially in hot real estate markets with a shortage of homes for sale. Alternatively, you can purchase houses or apartments to rent out. As long as you keep reliable renters in the homes, this can be an excellent source of monthly income.
Young Companies
Entrepreneurs are often in search of investors while in the early phases of developing a product, creating a company and establishing a clientele. You can invest in a firm that has only a prototype, or a young business on the verge of expansion. Either way, a small amount of money can grow into a huge payoff. Naturally, the opposite is true as well: the venture may fail and you may lose the bulk of your outlay.
There are ways to mitigate the risk, including doing market research and only investing in companies you are confident will be successful. If you lack the resources and expertise needed to conduct your own research, examine the young firm’s recurring revenue. The higher the reliable revenue, the better the investment may be.
Stocks
Investing in the stock market can be extremely risky, but the promise of high returns can make the risk worthwhile. One way to play the stock market is to research individual companies and choose one or several to invest in. Investing this way requires a great deal of time and knowledge. If you decide to take the single stock route, you can reduce your overall risk by diversifying your portfolio.
A simpler way to invest in the stock market is through index funds. A stock market index follows a large number of stocks. When you invest in an index fund, your investment grows along with all the stocks in that index. Your investment should match, rather than surpass, the overall return of the stock market, achieving a relatively predictable return over time.
Yet another way to invest in the stock market is through a stock mutual fund. Managed funds follow several companies and can be a solid investment, but beware of fees. High management fees can eat up profits while the funds may not outperform their low-fee counterparts.
Bonds
In general, bonds tend to be safer than stocks, but they pay a smaller return. The interest paid on government bonds is typically tied to interest rates. When interest rates are low, bonds usually have a low return as well. However, some types of bonds offer higher rates while still keeping risk relatively low.
Municipal bonds generally have a higher yield than federal government bonds and interest is exempt from federal taxes (along with state and local taxes if they apply). Corporate bonds tend to yield more than government bonds, but can still have limited risk. Obviously, you should choose which corporations you trust before investing. Bond funds, similar to mutual funds, bundle bonds of multiple companies, further reducing risk.
The world of investing and finance can seem mysterious and intimidating. Yet the bottom line is, if you have a little seed money and a lot of courage, you can create wealth.
