3 Low-Risk Ways To Earn Interest
Earning interest usually means taking on risk. But with bonds and cash accounts—and investing’s potential for compound interest—you can minimize that risk.
In 1 minute
When you don’t have much time to reach your goal, you can’t afford to make a risky investment. Thankfully, you can earn interest without putting everything on the line. Here’s how.
Bonds are one of the most common types of financial assets. They represent loans, which a business or the government uses to pay for projects and other costs. Just as you pay interest when you take out a loan, bonds pay investors interest. You’ll typically see lower returns than you might with stocks, but the risk is generally lower, too.
Cash accounts are similar to traditional savings accounts, only they are typically designed to earn more interest (and may come with more restrictions). These are great when you need your money to be readily available to you, but still want to earn some interest. And to top it off, many cash accounts are offered at or through banks so your deposits are FDIC insured, so there’s minimal risk.
In addition to bonds and cash accounts, there’s one more way to earn interest—investing and earning compound interest, which is the interest generated from previous rounds of interest itself. That’s right. As you accrue interest on your underlying investing funds, that interest makes money and that money in turn makes more money. The longer and more frequently your interest compounds, the more you can earn.
In 5 minutes
Want to earn interest? You usually have to take some risk which means you could lose some money.
Financial assets can gain or lose value over time. And investments that have the potential to earn greater interest often come with the risk of greater losses.
But there are ways to lower your risk. If you have a short-term financial goal or you’re just cautious, you can still earn interest. It might not be much, but it will be more than you’d get keeping cash under your mattress (don’t do that).
In this guide, we’ll look at:
- Cash accounts
- Compound interest
Bonds are basically loans. Companies and governments use loans to fund their operations or special projects. A bond lets investors help fund (and reap the financial benefits of) these loans. They’re known as a “fixed income” asset because your investment earns interest based on a schedule and matures on a specific date.
Bonds are generally lower-risk investments than stocks. The main risks associated with bonds are that interest rates can change, and companies can go bankrupt.
Still, these are typically fairly stable investments (depending on the type of bond and credit quality of the issuer), making them a good option for short-term goals. With municipal bonds, you can earn tax-free interest. These bonds fund government projects, and in return for the favor, the government doesn’t tax them. Invest in your own state, and you could avoid federal and state taxes.
Even when your goal is years away, including bonds in your investment portfolio can be a smart way to lower your risk and diversify your investments.
Cash accounts seek to earn more interest than a standard savings or checking account, and they’re federally insured by the FDIC or NCUA. (This is usually the case but depends on the institution housing your deposits (i.e., banks or credit unions). Check to make sure your account is insured before depositing any money.)
In most cases, there’s little risk of losing your principal. Your interest is based on the annual percentage yield (APY) promised by the bank or financial institution you open the account with.
One of the great perks of a cash account is that it’s highly liquid—so you can use your money when you want. It won’t earn as much interest as an investment, but it won’t be as tied up when you need it.
For short-term financial goals, a cash account works just fine. The key is to choose an account that meets your needs. Pay attention to things like minimum deposits, transaction limits, fees, and compound frequency (that’s often how it accrues interest). These differences affect how fast your savings will actually grow and how freely you can use it.
Compound interest refers to two things:
- The interest your investments or savings earn
- The interest your interest earns
It’s your money making more money. If you want to build wealth for the long-term, investing and allowing your interest to compound is one of the smartest moves you can make. The sooner you invest and put your money to work, the more opportunity your money has to earn compound interest.
Compound interest starts small, but can grow exponentially. Your investment has the potential to grow faster because your interest starts earning interest, too. If you start young, you have a huge advantage: time is on your side! While compound interest accrues with minimal risk, investing in the market involves varying levels of risk.
Start earning lower-risk interest
When your goal is right around the corner, you don’t want to risk missing it due to short-term losses. You want to make sure you have the money you need when you need it.
At Betterment, we help investors like you determine and match your level of risk with the time you have to reach your goal. You can open an investment portfolio and put more toward bonds to keep your stock exposure low. Or open a cash account to earn some interest while you build an emergency fund. Just want to focus on saving more money? We can help you save, plan, and work towards your cash goals, too.