I’ve said it before and I’ll say it again: money is a tool. It’s a tool to build and maintain the life you want to live. That said, unlike physical tools, money as a tool can grow when you’re not looking. (I don’t know about you, but I’ve never heard of self-replicating hammers!) But what’s the best way to make your money work for you?
One of the first financial bloggers that I followed, Mr. Money Mustache likes to think of his dollars as employees. When he budgets, he mentally puts those little employees to work. And it’s a great way to visualize the way your budget works. Are you getting the most out of what you have?
But that begs a question. I had a friend recently ask what the best way to invest his money would be. My immediate reaction was to ask what his goal was. If you don’t know what your financial goals are, it is SO much harder to build and execute a plan for how to make your money work for you. So let’s start there.
Financial Goals
If you have absolutely no financial goals (or even if you do), I would suggest taking some time to consider the life that you want to live. That should be the foundation of all of your financial goals. Even the annoyingly required financial obligations (ahem, debt payment) in your life fit into the picture of how you want to live. Paying off my student loans was a big goal of mine because I wanted to be debt-free.
I talk more about financial goals in this post, if you’re interested. But know that, in the absence of goals around your finances, you’ll likely be making reactive decisions based on your financial fears. It’s better to be proactive than reactive when it comes to finances. Trust me.
Making Your Money Work for You and Your Financial Goals
Ok, so you have your financial goals. I don’t care what they are, really, because what the goal is doesn’t matter as much as when the goal is. WHEN is more important because the aim is to have some level of reassurance that the money is going to be there when you want to use it. So let’s look at the best ways to make your money work for you, based on the time frame in which you want to spend it.
Short-term (anything less than a year): Savings Accounts
This is pretty straightforward. If you want to use your money within the year, the best place to park it will be a savings account. Savings accounts have a very narrow range of interest rates, and so it might not seem worth it. But when your timeframe is so short, you don’t want to introduce any more risk than you have to! A savings account is stable and the money will be there when you want to use it.
I highly recommend using a savings account comparison tool like this one from Nerd Wallet to choose your account.
Mid-term (1-5 years): Bonds, Savings Accounts, Credit Card Rewards, Etc.
When you have a few years before you want to spend your money, you have a few more options. A savings account is still a safe option, but a bank won’t give you much interest in a savings account. With a little more time to grow, bonds become an option for you. A bond is a loan to a company or government with a set interest rate and repayment date. For more information, see this post. With a bond, your money will be out of your hands for longer, but in return, you get a higher interest rate than a savings account.
Another option to consider if your savings goal involves retail purchases is credit card rewards. Obviously, if you’re looking to buy a house or a car, you won’t be able to use reward points. But if you’re planning a big vacation or looking to drop a lot of money on refurnishing your home, credit card rewards are a great way to make your everyday purchases work for you. When my husband and I were planning our wedding, we deliberately used our high-reward credit card for every purchase so that we could put the points toward honeymoon expenses.
A word of warning about credit cards: they must be used intentionally. If you’re going to use a credit card as part of your financial plan, make sure you’re paying it off every month!
Long-term (5+ years): Investing
A quick note on timeframes: feel free to use any of the techniques for short- or mid-term goals on long-term goals. But I highly discourage investing for goals of less than five years. And the reason for that can be summed up in one word: volatility. The stock market is volatile. It moves suddenly and for reasons that even economists can’t fully explain.
But if you’re looking to park savings in one place and not touch it until, say, retirement, investing is a great way to see solid growth. More information in this post, but remember: time in the market beats timing the market. Also, buy index funds – they’re more stable.
Make Your Money Work for You – Non-Financial Goals
Another way to make your money work for you is to invest in yourself. Certifications, industry conferences, hell, even a side hustle are all valid ways to work toward the life you want to live. And don’t forget about hobbies that you enjoy but don’t bring in any cash. Make sure you’re nurturing hobbies and habits that make you feel fulfilled and rested. And if you need it, I hereby give you permission to do things that you enjoy without pressuring yourself to build them into side hustles that make money.
When Things Aren’t Working Out
Have you ever broken up with someone by saying, “It’s not working.”? You might find that some of your financial goals aren’t working for you the way you wanted them to. Don’t be afraid to edit them or drop them entirely! The goal here is to make your money work for you, and you’re the only one that can define what that means.
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