How to Get Interest Working for You Instead Of Others

by Hank Coleman

This is a guest post by Miranda Marquit. If you are interested in possibly guest posting on Own The Dollar, check out the site’s guest posting guidelines.

interest working for you makes money growMany of us bemoan the evils of interest. This is because most of us are paying it. And, of course, when you are paying interest, it means that your money is making someone else rich with interest working for them instead of you. The key to making interest your ally is setting things up so that you are that someone else. Here’s how to do it:

First: Pay Off Your High Interest Debt

The first thing you need to do is to pay off your high interest debt. Credit card debt is probably the biggest issue at this point (although you want to get rid of payday loans and car title loans as well). When you have high interest debt, it will negate your efforts to earn interest elsewhere. It is very rare that you can generate the type of returns that will overcome your credit card interest. So, do your best to pay off your credit card debt faster, and then you can start putting yourself on the receiving end of interest.

Ways To Beginning Earning Interest Working For You

The good news is that there are a number of ways that you can put your money to work for you, earning you interest. However, you should realize that different options come with varying degrees of possible returns. And, of course, the higher the potential return, the higher your risk of loss. Here are a few ways for beginners to start earning interest:

Cash Products: Cash products offer you the chance to earn a return in almost complete safety. High yield savings accounts and certificates of deposit are the most common ways that most of us earn interest from cash products. If you’ve looked at a yield, though, you know that cash products won’t help you earn anything thing really fast. However, your money is safe (up to $250,000) if it is kept in a bank insured by the FDIC.

Bonds: If you are interested in a little bit higher yield, you can consider bonds. These are essential loans you make to governments and corporations. You can usually get better yields with bonds than you would with cash products. However, there is a chance that there will be a default, and you could lose money. U.S. Treasury bonds are considered among the safest in the world, though, and there are even inflation adjusted options. You can also consider corporate bonds and municipal bonds.

Stocks: You can earn interest with the help of stocks. If you invest, and the stock price rises, you can reap the benefits. If you are nervous about picking stocks, you can make use of index funds and ETFs to help you reduce your risk. (It is worth noting that there are bond index funds and ETFs as well). The potential for gains is better with stocks — especially over the long haul. But be prepared for potential losses as well.

P2P Lending: When you borrow money, you pay interest to someone else. Why not lend money have someone else pay interest to you? That’s the idea behind P2P lending. You can go through sites like Lending Club, Prosper, and TuitionU to lend money to other people. You receive interest from the loan you make. However, the risk of default is there. Still, there are those who are quite successful at it.

Of course, once you are more comfortable with the idea of risk and volatility, there are other ways to earn interest, including commodities, currencies and a whole range of investments. The important thing is to realize that you will never be truly free financially until interest stops being your enemy.

Miranda Marquit is a professional blogger, writing for a number of personal finance web sites, including the AllBusiness Personal Finance Corner and Credit Score Blog.

(photo credit: Shutterstock)

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{ 5 comments… read them below or add one }

John Pollock January 24, 2011 at 9:22 am

Forgot to mention to pay off the mortgage. A mortgage is a large balance compounded for 15-30 years and billed from the already compounded money, no other loan works this way, it is not a good deal and should be attacked as if it was a poison, instead many financial columnists and BLOG’s consider it to be OPM and a great way to leverage, it isn’t, ANY debt that creates negative cash flow should be reduced.

If you run a “Cash Flow Equivalent Return” on all the recommended “investments” the columnist suggested you will see that reducing the mortgage has a higher return,…. really!

Remembering High Interest CD Rates January 28, 2011 at 9:58 am

Unfortunately, these days John Polluck is right. The days of free money from high interest savings vehicles are a distant memory. Anyway, thanks for the tips. I was especially interested in your suggestion to go to the lending clubs. I hadn’t really thought of that one before. How risky would you say that is? Any tips for reducing it?

Zezb January 29, 2011 at 7:05 am

How does one earn interest on a Stock? Stocks may appreciate in value, but that is not interest. Stocks may pay dividends, but that is not interest. Another blog post polluting the terminology of investing. Thanks for making it easier to beat others!

Tom Juhn February 3, 2011 at 4:20 am

This great advice. Nothing new though. I have tried Prosper for P2P lending. I have to warn you a lot of deadbeats looking for money that have no intention of repaying

Investor Junkie February 7, 2011 at 8:56 pm

I can speak for P2P lender, Lending Club. I’ve had great results so far with them I’ve been posting quarterly results on my blog. So far I’m getting 10.80% NAR with 2 defaults and overall 200 loans. To find out more you can visit my web site.

http://investorjunkie.com/4/lending-club-review/

Lending Club is certainly not without risk, but it is a good alternative to the other low rate fixed income investments.

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