Low interest rates might be good for the economy and consequently for the Stock Market; however, it is no laughing matter to the millions of seniors that depend on fixed-income investments for their retirement income. With the current Treasury yields below 1% (see Treasury.gov), investors are finding that the low interest rates make it difficult to put their money to work. When interest rates are low, it is time to look elsewhere to invest.
Make Your Money Work Harder
Before we get into the investments that work well in a low interest environment, I want to cover some ideas to make sure you get the most of what you have now.
1. Get to Most From Your Bank Accounts
First, make sure all your money is working for you. Are you getting the highest interest rates for your bank accounts? If not, shop around. You can start with these lists of high yield accounts:
2. Cut Your Expenses
If you haven’t review your budget for places to cut expenses, it doesn’t hurt to review it with a fine-tooth comb. Here are more than 40 ideas to help you save money, lower your bills, and cut expenses.
Every dollar you saved is one less dollar you have to earn — cutting your expenses is totally worth it!
3. Look for More Income
Whether you’re retired or work a full-time job, it doesn’t hurt to do some side hustles and make a little bit of extra money. Here is a list of 40+ ideas to help you make some money on the side or even while you sleep!
Every dollar you earn outside of your job and investment accounts means you can keep more money invested and grow your portfolio.
4. Pay Down Your Debt
If you’re in the position to decide between paying down your debt or investing the money, it is probably a better idea to pay down your debt (unless the interest rate is really low…like 2-3% low, or it is your mortgage).
In general, you have to earn 1.4 times more through investing to make it a better option than paying down debt. For example, if you have a 10% interest rate debt, you’d have to earn at least 14% to justify investing instead of paying down that expensive debt. Typically, you are better off paying any debt with an interest rate of 5% or more first. Paying them down is a legitimate “investment” strategy!
Two Investing Strategies for Low Interest Rate Environment
1. Invest in Dividend Paying Stocks
Investing in the stock market does carry more risks than fixed-income investing and FDIC-backed bank accounts. However, some strategies can be used to minimize risks, for example, you can invest in dividend aristocrats. Dividend Aristocrats are companies that have been consistently raising dividend payments annually for at least 25 consecutive years.
A properly built dividend income portfolio can return 3% to 5% just in dividends. Factor in annual dividend increases and compounding interest and your returns can skyrocket each year after.
Finally, dividend stocks can also provide capital gains in the event they are sold, making them a lower risk investment option.
2. Real Estate Investing
Real estate investing is a time-tested investment, and can be a great source of income. There are many ways you can invest in real estate, check out our list of 8 ways to invest in real estate. There are bound to be 1-2 ways that work well for your situation.
There are multiple reasons why real estate is particularly attractive:
- Real estate has a strong track record of appreciating in value.
- Mortgage interest rates are at an all-time low.
- Both your home loan and your physical property act as an inflation hedge.
- Real estate investment provides many tax benefits.
Unfortunately, this is not a great time to earn money through your bank or fixed-income investments. If you are tired of earning sub-1% on your money, consider alternative investment options that can help increase your return.
- Putting your money to work in dividend-paying stocks can provide a steady income along with capital gains.
- Real estate investing, whether that means buying REITs or a rental property, could be an excellent opportunity that offers higher returns.
What alternative investment options can you suggest to help grow your money?
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.