By Mirella Nustedt | Bricksave
March 17, 2023
For many people, savings are a lifeline during hard times. You may need to dip into them if you’ve recently lost your job, have expensive medical bills to pay, or need to provide financial support to a relative who requires full-time care.
Today, you are more likely to find gold beneath a rainbow than a cash savings account that pays above inflation.
It's important to keep some of your savings in cash that can be used for an emergency, like fixing a broken boiler in the middle of a cold snap, or if you suddenly lose your job. But if you keep all your savings in cash, you'll find it much harder to build your wealth and protect your savings from being eroded by inflation over time. In the UK, for example, stocks have generated an average of 4.9% returns each year, while cash has generated an average of just 0.7% a year, according to a Barclays Equity Gilt Study.
How much emergency cash should you have?
This depends on many factors such as your living costs, how many people depend on you financially, and how much you spend on food, bills, holidays, etc.
American consumer finance expert Suze Orman recommends you keep 12 months of expenses in an emergency fund to meet your essential costs.
Many financial advisers recommend investing your money in a globally diversified portfolio, which may include a mixture of stocks, bonds and real estate assets. As you continue investing small amounts of money on a regular basis, the value of your investments will grow. But the magic happens when your investments earn ‘interest on ‘interest’.
10% growth on $100 becomes $110 ($10 gained)
10% growth on $110 becomes $121 ($11 gained)
10% growth on $121 becomes $133.10 ($12.1 gained).
10% growth on $133.10 becomes $146.41 ($13.31 gained)
As you can see from the above, the value of your investments grows as new interest is earned on previous interest. This is known as compounding.
You don’t necessarily need to keep your investments locked away for many years. Although this is the best way to generate long-term returns, you can also take out a small portion of your investments as an income.
If you invested $50,000 and earned an 8% net annual return (yield), you would have at least $4,000 available by the end of the first year. If you withdraw $2,500, you could reinvest the remaining $1,500. The value of your investment would still grow to $51,500 (assuming the yield remains at 8%)
But how do you achieve it? And how can you keep your money protected from market volatility?
Let’s find out…
1 - Invest in stocks that pay you dividends
How do stocks work?
Stocks, otherwise known as shares, are a portion of a company. When you buy them, you’re owning a tiny piece of these companies. Funds are collections of shares of companies, which will typically comprise large global corporations that have a strong track record of generating long-term, inflation-beating returns.
Beware that some companies, such as high-growth start-ups, retain all their profits so don’t pay any dividends.
How do stocks pay you dividends?
Some companies pay dividends to redistribute their profits to their shareholders, while others reward their investors additional shares/stocks. Depending on how much money you have invested in the company, this can be a valuable and reliable source of income.
Dividends are typically paid every three months (on a quarterly basis), although some companies pay them annually or even monthly.
Will you need to pay tax on your dividend income?
This depends on where you live and how much income you receive. Tax laws vary widely across different jurisdictions, so research this first or speak to a financial adviser who may be able to help you reduce your tax bill.
Which stocks should you invest in?
2022 was an unusually turbulent year for the stock markets. After a record-breaking year in 2021 - driven in part by the rapid growth of U.S tech start-ups and the end of lockdown restrictions, 2022 was one of the worst years on record.
The best performers were large energy companies such as Exxon Mobil (87.4% growth) and Marathon Petroleum Corp (86.6% growth), but every other sector in the S&P 500 declined.
But the longer-term picture paints a different story. The value of Exxon Mobil shares, for example, rose by about 300% from 2002 to 2007 before falling significantly after the 2008 recession. Had you invested $1,000 in Exxon Mobil shares in June 2014, you would have been left with about $750 five years later. But since late 2020, the value of these shares has risen by over 300%.
No one can predict the future, but one thing is certain: stocks can be extremely volatile, even when the economy is performing well.
2 - Buy index funds that pay dividends
How do index funds work?
An index fund is a fund that tracks a market index such as the FTSE 100 or the S&P 500. Historically, these market indexes have generated good long-term returns that have exceeded inflation, which is why they're often recommended for long-term investing such as saving for retirement.
Index funds are still susceptible to short-term market volatility, which is another reason why they’re best suited to longer time periods of 10 years or longer.
How can you receive an income from index funds?
A Dividend Index Fund pays you a portion of the profits generated by the companies on the market index.
These index funds are designed to track companies that tend to pay relatively high dividends and have a good track record of generating long-term returns.
Like with regular stocks, if the index fund performs badly, the value of your dividends will also fall.
But what about bonds? Don’t they provide a guaranteed passive income?
If you’ve read other articles on this topic or consulted a financial adviser, you may have been advised to invest in bonds or include bonds in your portfolio allocation.
A bond is a loan that you make to a borrower, usually a corporation or a government, in exchange for a regular, fixed income over time. Many corporations and governments use bonds to raise money to finance new projects and services.
If you hold your bond to its maturity date, you will receive the full amount of what you paid in, along with interest. Your goal should be to profit from the interest your bonds earn. But this depends on the original interest rate of the bond. If this is lower than current rates and inflation, you may end up losing money in real terms.
Why didn’t we include bonds in our top 3?
The reason we haven’t listed bonds as one of the top 3 ways to turn your savings into earnings is that interest rates are likely to continue to rise for as long as inflation is a threat. As bond prices fall, your capital is at risk, because you may end up selling the bond at a lower price than you bought it for.
Stocks also outperform bonds in the long term
For example, in the U.S, the average stock market return is about 10% a year, falling to about 6% to 7% when you account for inflation. In comparison, the U.S. 10-year Treasury Bond (a government bond) generated an average annual yield of 2.95% in 2022. For the period 2013-2022, the average annual yield was just 2.15%.
This doesn’t mean you shouldn’t include bonds in your investment portfolio
As they are subject to much less volatility than shares, including bonds in your portfolio can help you reduce your exposure to market downturns. Bonds also provide better returns than cash, the latter of which loses value quickly as inflation rises.
Because interest rates have also risen, many bonds today are cheaper and offer higher yields. But if inflation remains high, the income you earn from the fixed interest rate of a bond would be worth less in a year's time. On the contrary, if inflation and interest rates were to fall significantly in the next few years, the income you earn from bonds bought today would increase in value over time.
3 - Invest in real estate via crowdfunding. Earn money from rental income and capital appreciation
Many people, particularly those in the Millenial and Generation Z camps, are struggling to afford a mortgage. The first hurdle is the deposit, or down payment, which is usually a minimum of 10% of the property's asking price in the U.K and typically about 20% of the asking price in the U.S. The second hurdle is repaying the mortgage loan, which usually lasts about 25 to 30 years. Plus, when interest rates rise, if you have a flexible mortgage or your fixed term is coming to an end, expect your repayments to go up.
How does real estate crowdfunding work?
Real estate crowdfunding allows you to invest in the real estate market without the hassle of having to finance, own or maintain a property.
How can you earn a rental income from real estate?
Here’s an example of how you can earn an income from investing on a real estate crowdfunding platform:
*Local taxes may apply.
If you're new to investing:
Real estate is often out of reach for people who don't have significant savings, while luxury real estate has often been reserved for High Net Worth (HNWI) people and institutional investors. Many real estate crowdfunding platforms still have fairly high minimum deposit requirements, which can be as high as $10,000 to $25,000. These will be out of reach for many new, often younger, investors who don't have this money at their disposal. Fortunately, Bricksave’s platform allows you to invest with as little as $1,000.
Luckily, you don't need any investment experience to get started with real estate crowdfunding. Bricksave has a team of expert advisers and risk managers who do all the hard work for you, hand-picking the best investment properties from across the globe, and taking care of all the legal and administrative work.
If you're an experienced investor:
If you have a lot of investing experience, you'll probably know that real estate can provide reliable long-term investment returns that regularly exceed stocks and bonds. With Bricksave, you'll benefit from a global, diversified portfolio of real estate investment assets that can generate superior returns of up to 9% a year.
If you're a financial adviser:
If you're acting on behalf of your clients, you may be considering adding real estate to their asset allocation to diversify their portfolios. Real estate crowdfunding gives you access to the best real estate opportunities in the world's most stable and secure currencies. Better still, Bricksave does all the complicated legal and administrative tasks, and manages each property throughout the lifetime of the investment, saving you money and time.
On Bricksave's platform, you can view, monitor and manage your portfolios at any time and receive monthly updates on your portfolios' performance.
If I have enough money for a mortgage deposit, why don’t I just buy a property and rent it out myself?
This is still a viable option, assuming you can get a buy-to-let mortgage. However, if you rent out your entire property, you’ll obviously need to find another place to live. So you’ll be paying your mortgage and the rent for another property (unless you’re lucky enough to live with a family member for free!).
There are other factors you need to consider with buy-to-let properties:
Rental income tax. This is taxed as ordinary income in the U.S; in the UK, it's 20% if your total income is below £50,270 (approximately $61,298).
Cost of maintenance. The average American spends about $3,000 on home maintenance each year, according to home services website Angi.
Sourcing tenants. The safest way to do this is to hire a realtor/estate agent to vet prospective tenants, create a tenancy agreement, maintain your home, and take care of any disputes. However, this can be expensive.
Property damage. If your tenants damage your property, you will usually still be liable for the cost of repairs.
Rental demand. If your property is in an area with limited rental demand, or demand falls over time, you may struggle to find tenants.
Fortunately, Bricksave takes care of all the property management and sourcing tenants on your behalf. Learn more about how you can get started with real estate crowdfunding by contacting us today.
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