Money stuffed in a sock or hidden under the mattress is idle money. Cash squandered on impulse purchases or lottery tickets is fantasy money, here today and gone tomorrow. Conversely, money made to work for you, now and in the future, is a productive and genuine asset. Here are five ways to get more out of every precious dollar.
Mortgage repayments
Interest rates may vary over time, and depending on where in the world you live. However, it will nearly always be the case that the loan secured against your major asset, your home, will be at a higher interest rate, viewed over the long term, than any investment of deposit you could make with your spare cash. So, if your mortgage agreement permits it, always use any genuinely spare cash to reduce your home loan.
Some home lenders offer a mortgage offset account, allowing you to use your spare cash to reduce your loan balance on a temporary basis, over and above your required repayments. This has the double advantage of reducing the amount of interest accumulating against the mortgage without creating a tax liability in the form of interest income. These voluntary repayments are often flexible i
n the sense that you may be able to withdraw them if your financial circumstances change and you suddenly need extra cash.
Do consider using this avenue to get more out of your money, because the effect of compound interest means that even small extra loan repayments will considerably reduce the overall amount you have to repay during the life of your loan.
Investment
Stocks and shares go up and down in the short term, and so does the value of real estate. However, if you can steel yourself to take a long term view of this kind of investment, over a period of twenty years or more without being tempted to chop and change, the rewards can be immense. It means investing in blue chip stocks and rock solid buildings in an area likely to be unaffected by the caprices of changing fashions, and there is still an element of unavoidable risk. If you take the advice of proven experts you will not only minimise your risk but also very likely see your investment outperform a bank savings account in the long term.
Savings account
This is the ‘set and forget’ investment for anyone who doesn’t have the fortitude needed to endure the roller-coaster ride of the financial markets. Interest rates start on a low base and consequently will be less subject to fluctuation. Regular small deposits and the effect of compound interest will see the nest egg grow over a period of years, and if you can resist the temptation to raid your fund you may well produce a nice financial cushion for your retirement years.
Buy at a discount for future needs
Taking advantage of discounts offered by retailers has to be the most overlooked way of getting more bang for your buck. Paying full retail price for anything is avoidable if you plan ahead. Supermarkets regularly offer huge markdowns on perishables nearing their expiry date, or other goods, known as ‘loss leaders’, simply to get you into the store. Sensible use of your freezer and larder space will allow you to take advantage of these discounts by buying now and using the purchases at a future date. Retailers of furniture, white goods and electronics have seasonal sales to clear perfectly good stock about to be superseded by newer models. In both cases the percentage discounts offered are far in excess of the interest rate you could make on any of your investments.
Make your money work for you by shopping for the future or by postponing your purchase until clearance sale season.
Donate to charity
This one comes fifth only because it is often the last avenue considered for spare money. The fact is that there are many charities who can make better use of your spare cash than you can. Your pocket change can transform the lives of the truly needy. Make a shrewd choice in order to avoid lining the pockets of the middle men and paid collectors fronting some of the more dubious charities. Forbes.com conducts an annual survey of 200 large charities, and produced a pictorial guide to the ten most efficient charities in 2010.
The added advantage of making a donation to charity is that most governments will reward you for your generosity by allowing you to claim the donation as a tax deduction.
Avoid putting your money in a piggy bank, where the only satisfaction you will get is the sound of one lazy coin coming to rest on top of the equally idle ones underneath. Get more out of your money by making it work. Do this by repaying your mortgage ahead of time, investing, earning interest in a savings account, taking advantage of discounts or saving the world.