If you want to supercharge the rate at which you’re compounding interest, there are investment options that can help you earn faster. Of course, you will have to weigh the benefits and risks of each option.
Real estate investment trusts (REITs)
While purchasing land or an investment property might not fit your budget, a real estate investment trust (REIT) provides a more affordable way to get involved in real estate.
A REIT allows you to invest in real estate without needing a large down payment. With a REIT, you pool your money with other investors to gain partial ownership in different real estate assets, including office buildings, shopping malls, hotels, or residential properties. When these real estate assets make money, you get a share of it.
You can buy and sell publicly traded REITs on the stock market. Non-traded REITs don’t trade on the market, which makes them more difficult to buy and sell.
U.S. stocks
A stock is a type of security that allows you to buy a small piece of ownership in a company. When you purchase a stock, you become a shareholder and earn a part of the company.
Stocks are traded on the stock market. Companies will sell stocks when they need to raise money. If you invest in a company that does well, the value of the stock will go up. Stocks can often provide higher earnings than a HYSA or CD account but also carry greater risk. If the stock goes down, you can lose your investment. Generally, the longer you leave your money invested, the more time it has to grow and compound.
I bonds
Governments and corporations often issue bonds as a way to raise money. When you purchase a bond, you are giving the issuer a loan that they agree to pay back by a specific date, with interest.
I bonds are specifically designed to protect you from inflation. With an I bond, you can earn both a fixed interest rate and a variable rate that changes with inflation. The variable interest rate is set twice a year, and interest is typically compounded semi-annually.4 With an I bond, your rate will never fall below zero.
If you want to save for the long term, you might consider an I bond. I bonds are designed to earn interest for up to 30 years, but you can cash them in after 12 months. However, if you cash in your I bond in less than five years, you lose the last three months of interest. For instance, if you cash in your I bond after 20 months, you will only earn the first 17 months of interest.
Corporate bonds
A corporate bond functions much like an I bond, except you are lending money to a company instead of the government. With a corporate bond, the company commits to paying you back your money, with interest, when the bond matures. The bond maturity date is the time when the company has agreed to pay you back.
You can choose a short-term bond (less than three years), medium-term (four to 10 years), or long-term (more than 10 years).5Â The longer you commit to leaving your money, the more interest you can potentially earn.
Some bonds offer a fixed interest rate, where the interest you earn stays the same for the entire term. Floating rates bonds are also available. The interest rate for these bonds changes periodically according to market rates or a benchmark.
Zero-coupon bond
A zero-coupon bond is a bond that doesn’t make any interest payments until it reaches its maturity date.6 These bonds are typically long-term investments that don’t mature for ten years or longer. When the bond matures, you receive the original purchase price plus interest. For instance, say you purchase a five-year zero-coupon bond for $800. When the bond matures at five years, the bond is worth $1,000.
With a zero-coupon bond, you typically have to pay taxes each year on the prorated amount of interest before you earn the interest at bond maturity.
