During unstable economic times, it’s more important than ever to be smart with money. If you have a fairly large amount, such as 10k, you need to think especially hard about your overall financial strategy.
If you were to save or invest that money, it could make a meaningful difference to your quality of life. But what could be the right investment for gaining the maximum benefit from that $10k?
1. Bank Savings Accounts
Opening a savings account is the simplest possible way of investing your money, although it isn’t necessarily a bad thing. You are paid a predetermined interest rate, but it isn’t a huge amount. Overall, it’s a good old-fashioned principle of saving money.
The biggest benefit is that hard-earned cash isn’t exposed to fluctuations in the financial markets. So, this makes the risk of losing your investment very slim. Also, your money is protected by the Financial Services Compensations Scheme. That said, there are inherent drawbacks, such as the possibility that your savings may not grow fast enough to offset the inflation loss.
- Free to open
- Any investment amount to start with
- Easy access to your money
- Money is safe in well-protected vaults
- No lock-in period
- Automated bill payments
- Temptation to spend
- Rates and inflation can change
- Monthly, maintenance, and ATM withdrawal fees
- Minimum balances requirements
2. Real Estate
You might think that you need significantly more money to invest directly in the real estate market. However, 10k is enough to get into a real estate investment trust (REIT) or a real estate-themed exchange-traded fund (ETF).
REITs are designed to allow multiple investors to combine their funds in a common pool. The shareholders have a proportional interest in the profits depending on the assets they own. ETFs raise capital to invest in various different things by selling shares to their investors. Both options can help you get into the industry of home flippers, real estate agencies, and rental unit management.
- Great portfolio diversification
- Reduced volatility and consistent ROI
- Tax benefits
- Appreciation potential
- Generates passive income
- Steep learning curve
- Time-consuming property management
- Requires you to be a landlord as well as an investor
- Can be problematic
Equities is another name for shares, stocks, or securities. This is the first thing that people imagine when they hear the term “investing”. An online broker service can process your transactions, which comes at a cost (but not a significant one). If you work with a full-service platform, there may be higher charges, but also personalized advice.
For example, in 2019 alone, the S&P 500 index returned 31.1%, which made it a pretty attractive investment. That said, one year isn’t a good enough indication as in 2018, the annual returns were negative (around -4%).
- Possibility of substantial growth
- Ability to beat inflation
- Easy to diversify stock portfolios
- Ownership and influence over companies
- Potential income from dividends
- Associated with higher risk
- Subject to severe fluctuations
- Takes time to research
- Emotional ups and downs
Options investing focuses on a yes/no proposition based on an underlying asset performance during a particular time. Unlike traditional investments, trading options allow you to profit while the market moves in any direction. The key is to accurately predict the asset’s movement over time.
Another difference between traditional financial assets is that it’s much simpler to understand as a beginner. The price can either go up or down. So, you may not have a financial background or trading experience but could still do well in the field of options.
Also, there are no liquidity concerns since you don’t actually own the underlying asset. Speaking of the underlying assets, there are numerous asset classes available in financial markets.
- Possibility of big swift returns
- Simple to learn and understand
- Different types of binary options
- You know both the risk and reward in advance
- Exciting activity
- No minimum investment balances
- Poor industry regulation
- Risks of speculative activity
- Earnings potential is limited
In Australia, if you work for an employer, 9.5% of your pre-tax wages goes into an account that accumulates interest. If you’ve worked for multiple employers, you might be charged separate maintenance fees. By consolidating your super into a single fund, you can make more effective contributions and gain higher interest earnings.
It’s important to mention that this one is a very long-term investment strategy. Even if you invest your 10k now, you will be able to enjoy the benefits at a much later time.
- Lower fees
- Side benefits (life insurance and disability policies)
- Builds your retirement savings
- Lowers your investment tax bill
- Allows consolidating for a bigger balance
- Limited eligibility
- Problems associated with bureaucracy
- Limited investment choices
- Age limits
For those investors who are looking for long-term opportunities (lasting five to ten years), bonds and cash-equivalent investments are a good choice. Bonds are loans made to large organizations, and most bondholders resell them before they mature at the end of the loan period.
It’s impossible for small investors to buy individual bonds because they are usually traded in large quantities. That said, maintaining a diversified bond portfolio through bond mutual funds or bond ETFs can help investors prepare for market shifts.
- Less volatile
- Low risk of default
- Fixed income on a fixed schedule
- Good legal protection
- Fits different needs of investors
- Modest returns
- Lack of long-term growth
- Direct exposure to interest rate risk
- Creates reinvestment risk
7. Commodities and Futures
Commodities are raw materials (like oil, gold, sugar, etc.) that can be bought/sold. Futures are contracts to buy/sell a commodity at a predetermined price on a certain date. There are about 50 major commodity markets in the world that offer investment trade in about 100 primary commodities. Bear in mind that this investment type suits more experienced investors.
- Hedge against inflation
- Involvement in the sector without trading individual contracts
- Increased portfolio diversity
- Only requires a fraction of the contract amount
- Access to safe-haven commodities (i.e., gold)
- Loss potential for profits
- Twice as volatile as stocks
- Susceptible to quick price changes
- Not a core holding
8. Cash Management Accounts
A cash management account combines services and features that are similar to checking, savings, and investment accounts under one product. These accounts pay interest, which is where your gains come from. You might earn the same interest rate no matter how much your account balance is, but some services offer tiered rates.
- Above-average interest rates
- Benefits similar to checking and savings accounts
- Simplified account ownership
- ATM rebates, mobile deposits, and many other features
- Opening and ongoing balance requirements
- Money is exposed to potential processing errors
- No Australian Government guarantee
9. Listed Investment Companies (LICs)
LICs are a subset of what the ASX (Australian Securities Exchange) calls listed managed investments. LICs are essentially funds that have an external or internal fund manager selecting and managing the company’s investments.
You can buy/sell LICs on the exchange through a broker or online trading account. It’s up to you to decide which investment style to choose and to uncover which LIC has a portfolio that suits your objectives.
- Low-cost option
- A broad range of assets
- Makes reinvesting your dividends relatively easy
- Transparent in disclosing their NTA values
- Doesn’t show huge growth
- Annual management fee
- Subject to general market risk
10. Invest in Yourself
Not to sound clichéd, but putting money into your own self-improvement is also a worthwhile investment. For example, you could go back to school or taking online classes, which could improve your career opportunities. Or you could enter other certification programs that can potentially generate more financial benefits in the future.
Alternatively, you can direct 10k into paying off your debts if you have any. Even though you’re not gaining interest or other quantifiable perks, you take the stress off your mind. And when you ready to start with a clean slate, you can invest in the investment alternatives we’ve described above.
Factors to Consider When Making Investment Decisions
Your investment portfolio should only consist of products and activities that suit your needs and contribute towards the attainment of your goals. Before investing, you should first consider these factors to determine when, where, and how to invest:
- Your objective for investing – are you looking for higher gains or a moderate but stable appreciation of your investment? There is a difference between needing money to afford necessities and aiming to earn extra money for a decent lifestyle.
- Your age – in investing, being young gives you an advantage. Here, you can afford to choose lower gains, which will accumulate over time. If you’re middle-aged and thinking about retirement, you might need something more aggressive.
- Time before you need the money – this point slightly ties in with the previous one. However, even when you’re young, you might need to multiply your funds quickly. Short- and long-term goals require different strategies. Also, you should take time to assess the tax implications of withdrawing your investment.
- Risk tolerance – the higher the risk, the more potential there is for higher returns. In any case, you should invest and risk only an amount of money which won’t cause you stress in the middle of the night.
- Your understanding of financial products – be sure you know where you’re heading. Most people find financial products complicated. But it’s important to have at least a general idea of how they work.
The key to financial stability isn’t only in making money, but in keeping it and growing it. The same principle goes for any amount – whether you have $10, $100, or $10,000. If you treat both large and small amounts with equal care, you will develop wise financial habits, which will certainly have a positive impact.