3 Low-Risk Ways To Earn Interest
Earning interest usually means taking on risk. But with bonds, cash accounts, and compound interest, you can keep that risk as low as possible.
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 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.
The longer you invest, the more time you have to earn compound interest. This is the interest you earn and the interest your interest earns. That’s right. As you accrue interest, that interest makes money and that money in turn makes more money. The 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 ideal for a short-term goal. 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. Learn more about how earning interest and bond income works at Betterment.
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 you can expect to have down the road.
Compound interest starts small, but it grows exponentially. Over the course of decades, it can easily become hundreds of thousands of dollars depending on how much you invest upfront. Your investment grows faster because your interest starts earning interest, too. If you start young, you have a huge advantage: time is on your side!
The graph below shows that if you invest over time, compound interest can grow your portfolio much quicker than just saving cash over time.
With interest, you need to know how often it compounds. There’s a huge difference between interest that compounds daily, monthly, and annually. The more frequently it compounds, the more interest you earn.