If you're saving up for the future, you're on the right track. But where you put that money matters as much as how much you're able to put away each month.
A new survey by Bankrate.com through Princeton Survey Research Associates International asked more than 1,000 Americans what they consider the best way to invest money they won't need for 10 or more years. The most popular answer, chosen by 28 percent of respondents, is to use it to buy real estate.
Zero-risk cash investments, such as high-yield savings accounts, came in second with 23 percent of respondents, while the stock market took third place, with 17 percent of respondents.
However, just because something is popular doesn't mean it's wise.
Although owning a home and contributing to a high-yield savings account can both help you build wealth, neither are the optimal way to maximize returns in the long run, Bankrate points out.
"The preferences for cash and real estate indicate that too many people are leaving money on the virtual table by failing to be sufficiently exposed to the stock market, where higher long-term returns are found," says Mark Hamrick, Bankrate.com's senior economic analyst. "This is especially the case for younger investors, who are in the best position to weather the inevitable short-term market volatility."
Bankrate cites a study from London Business School and Credit Suisse, which found that after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011, while stocks performed more than four times better. So while financial experts, such as self-made millionaire David Bach argue that a home is a crucial investment, real estate is still not a substitute for a retirement fund.
High-yield savings accounts offer higher dividends that traditional ones — one percent returns versus 0.01 percent — but they aren't a replacement, either. "Over the past 10 years, even including the financial crisis, stocks have returned an average of 8.6 percent per year," Bankrate reports.
Although entering the stock market might sound scary, it doesn't need to be. Here are a few low-stress ways to start investing:
- Sign up for your employer's 401(k) plan and take full advantage of any company match, which essentially gives you free money.
- Contribute to a Roth IRA or traditional IRA, which are both individual retirement accounts that offers tax breaks.
- Use micro-investing apps such as Acorns, which help you begin by investing small amounts of your "spare change." The app rounds up your purchases to the nearest dollar and automatically put your coins to work.
- Try other apps that aim to make investing simple and accessible.
- Consider automated investing services known as robo-advisors that can help you out no matter how much you have in the bank.
- Research low-cost index funds, which Warren Buffett recommends.
Of course, there's no guarantee how the market will perform in the future. Your returns will vary based on which accounts you choose, when you start investing and how much you contribute. But, if you have cash lying around that you're not going to touch for 10 years, you may want to try the method that has been offering the most reliable returns. And the earlier you invest, the better.
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