So here we are… part 3. Some of you may be looking at alternative investing options to the TSP, index funds, mutual funds, and stocks. And to be honest, there are plenty out there, it just depends on how much money you have and what you’re looking to do. Today, we’ll highlight a few options you may be interested in. We’ll cover peer to peer lending, real estate, and CDs/high yield savings accounts.
Ever try to get a loan to cover an expense and you don’t have any luck? Companies like lending club exist to ensure that people with credit challenges are able to get loans to pay of various debts… credit card debt, student loans, car payments, etc. Lending club is a peer to peer lender meaning that you can invest your money and other people borrow it. They break their notes into categories A-FG as depicted above and you get a percentage of the interest on the loans that people take out using your money.
What happens if someone doesn’t pay the loan back and defaults? Unfortunately, you lose money. But based on the law of large numbers, the more loans you give out, the more your risk is spread out. The chart above shows the historical returns of the options you have available. While it is lower than the average historical return of stocks (see S&P500), peer to peer lending is a good option to diversify your investment accounts. You can even open a Roth-IRA through the company. If you’re interested, you can go to lending club.com and open an account today.
Real estate may be something all of you are interested and familiar with. Glamorous images such as the beautiful $21.5 million Hawaiian home above flood the internet and people talk about getting rich through real estate seminars on a regular basis.
Real estate income is generated in two ways: rental income and appreciation. If you rent your house, someone is paying your mortgage. If your house goes up in value, you make money. Seems simple, right?
Real estate can be a bit of a challenge, however, if you don’t have a decent amount of money to start off with. Most home purchases require a down payment so the bank knows you have a vested interest in owning the property. We’ll go into more depth on the VA Loan later, but generally speaking, you need to put 20-30 percent down to own a home. If you can afford to do so, buying and renting is an excellent source of income. If not, I’d recommend you wait for our coverage of the VA loan in a later post.
The last alternatives we will cover today are high yield savings accounts and Certificate Deposits. The reason we’ve grouped these together is that they generate a similar amount of interest annually based on current rates.
A high yield savings account is an account that generates more interest than most other savings account. Right now, most high yield savings account yield between 2% and 2.5%. That may not seem like a lot, but take a look at what your checking account is yielding and you might be surprised. That number is probably closer to 0.14%. If you have a lot of money in your checking account and you need to access it in the near future, a high yield savings account may be the right answer. Take a look at the American Express high yield savings account, for example, that is yielding 2.1% at the moment. Such accounts are great because they are liquid — meaning that you can take the money out and move it whenever you need it. Additionally, they are FDIC insured, meaning that the federal government protects them up to $250,000.
A certificate of deposit or CD is a deposit in a bank that you cannot get back until it matures (meaning the time you signed up for is complete). A CD is a good tool for short term savings as well and guarantees you a rate of return… but you have to wait until the date you can collect the money. If you don’t trust yourself with money, a CD may be the right option for you if you are saving for a car, boat, or home. Since you can’t touch the money, it might be preferable to a high yield savings account as you won’t have the temptation to spend it. For more information on CDs, ask your local bank or conduct a search online. $