Having money beyond your day-to-day needs is great. It means that you can save and invest. It also means that you have choices.
How do you sort through what to do with that money?
It helps to know your goals, priorities and timelines. But let’s take a look at some of the most common things you can do with your money including some of the best and worst investment choices.
Here are 11 popular ways you can use your money from least risky to most risky.
Table of Contents
Places for Money You Need in Less Than Five Years
1. Keep Your Money in Cash: Very Low Risk
2. High-Yield Savings: Very Low Risk
3. Certificates of Deposit: Very Low Risk
4. Series I Bonds: Low Risk
5. Short-Term Bonds: Relatively Low Risk
Money You Can Leave Alone for a Minimum of Five Years (10+ Years is Better)
6. Real Estate: Moderate Risk
7. Broad ETFs and Index Funds: Moderate Risk
8. Value Stocks: Somewhat High Risk
9. Growth Stocks: High Risk
High-Risk Bets To Make Only in Specific Circumstances
10. Crypto and NFTs: Extremely High Risk
11. Angel Investing: Extremely High Risk
A Word of Advice from Clark Howard
We’ve attempted to identify the risk of each of these best investment options in 2022.
Some are so risky that money expert Clark Howard doesn’t recommend them at all, while others are part of his core investment strategies.
However, there are two dynamics that can vastly increase or decrease your true risk with any of these options: time and position size.
Let’s start with time. Clark says that Options 1-5 are great when you’re going to need the money in less than five years. However, if you need the money next week, a three-month CD could be a major issue.
Clark also says that Options 6-9 are good fits if you can leave your investments alone for at least five years (preferably 10+). He strongly discourages any type of investing if you’re counting on the money in, say, six months from now.
Position size is also extremely important. Investing is a necessity for most people to outrun inflation and fund retirement. But putting your entire net worth into a single stock — or even a small number of companies — is a huge risk.
The last two items, Options 10 and 11, are also about position size.
Getting involved with crypto is like betting in a casino. If you’re doing this with a small percentage of your net worth, preferably after you’ve done everything you need to keep your retirement and daily needs on track, the de facto risk you’re taking in your financial life is much smaller than if you’re putting in next month’s rent.
With angel investing, the most likely outcome is that you never see a penny of that money. Even if you’re wildly successful, you often will have to wait more than five years to see any return whatsoever. So angel investing is best for people with a net worth in the millions of dollars.
Places for Money You Need in Less Than Five Years
1. Keep Your Money in Cash
Risk Level: Very Low
When I was growing up, I heard “cash is king” pretty often. Some of my older relatives were rumored to keep it under their mattresses or inside the pages of their books.
Money still matters. But is cash still king? I use it only occasionally myself, relying on cards and electronic forms of payment daily.
There’s a place for cash. Clark keeps $400 on hand in case of emergencies. But keep too much of your net worth in cash and you’re getting hit with a triple whammy: inflation, opportunity cost (no chance to make a return) and storage.
Pros
- Outside of inflation, not impacted by market ups and downs
- Available to spend immediately
Cons
- Inflation quickly erodes your purchasing power
- No federal insurance
- Physical money can get lost, stolen or damaged
- High opportunity cost
2. High-Yield Savings
Risk Level: Very Low
For a long time now, people have searched for savings account alternatives because of historically low interest rates. Even the best high-interest savings accounts are paying little more than 0.5% APY.
However, FDIC-insured savings accounts earn more than cash and don’t pose any risks. Savings accounts are also ideal for emergency funds and saving for near-term expenses such as vacations and car or home purchases.
If The Fed raises interest rates at some point in 2022, there’s a possibility that interest rates will slowly start to improve.
Pros
- Better ROI than cash
- Liquid
- Many practical uses
Cons
- Historically low interest rates
- Inflation eating into purchasing power
3. CDs
Risk Level: Very Low
CDs, or Certificates of Deposit, usually pay at least a little more interest than savings accounts. In exchange, you promise the bank not to withdraw the money for a certain length of time.
If you know you’re going to be making a major purchase in, say, one year from now, Clark doesn’t suggest investing the money and hoping for a return. But in that circumstance, putting it into a CD could earn a few extra dollars than leaving it in a savings account.
Pros
- Better interest rates than savings accounts
- Helpful for non-emergency savings goals
Cons
- Penalty for withdrawing early
- Not a good place for emergency funds
- Can lose advantage over savings accounts if interest rates increase
- Inflation is far outpacing interest from CDs this year
4. Series I Bonds
Risk Level: Low
These U.S. government bonds give you interest plus inflation protection. That second part is particularly important right now as inflation is sky-high.
Series I bonds mature after 30 years, although you can cash out without a penalty after five years. You can buy up to $10,000 of these each year.
Clark says now is a good time to put money into a Series I bond.
“If you go to a giant monster mega-bank, they’ll pay you one one-hundredth of one percent on your savings. If you go to an online bank, they’ll pay you half a percent on your savings. With Series I savings bonds, the federal government itself will pay you right now for the next six months, an interest rate of 7.12%,” Clark said in November.
Pros
- Inflation protection
- Superior return compared to cash, savings and CDs
Cons
- Long time horizon
- Not a replacement for investing in the stock market
5. Short-Term Bonds
Risk Level: Relatively Low
When interest rates are low — while also stable or declining — ultra-short-term bonds can be great emergency fund alternatives. Clark has even followed that strategy himself in the not-so-distant past.
When the cost of borrowing money goes up, however, bond prices can fall.
After heavy speculation, the Federal Reserve Board didn’t raise interest rates at its last meeting. However, the general consensus is that it’s a matter of when, not if, interest rates will increase.
Investment managers and target date funds tend to allocate a higher percentage of your money into bonds as you reach retirement age and beyond. Bonds incur less risk than stocks, but they can and do go down in value sometimes.
Ultra-short-term bonds are a specific product that works better on shorter timelines — say, one to three years. As with most investment products, the shorter your timeline, the greater the risk.
Pros
- Good savings account alternative when interest rates are low and not rising
- Less risk than the stock market
Cons
- Tend to decline in value when interest rates rise
- Historical returns are much lower than stock market
- Not keeping up with inflation
Money You Can Leave Alone for a Minimum of Five Years (10+ Years is Better)
6. Real Estate
Risk Level: Moderate
Like many of these potential investments, there’s a huge range for what a real estate investment could look like — from a fractional share of an ETF to a sprawling commercial project worth hundreds of millions.
Also, entering 2022, home prices across the country are expensive.
Typically, the average house hasn’t performed as well as the S&P 500 in terms of annualized return. That’s especially true considering taxes, insurance, homeowner’s association fees, furniture and repair costs that come along with homeownership.
For many people, buying a home also means taking on a mortgage and paying interest. But there are plenty of people who buy rental properties, get a steady influx of cash and also make money while the price of the property appreciates.
Current times excluded, houses and other expensive properties often can be pretty illiquid.
Pros
- Lower risk than the stock market, especially individual stocks
- Low correlation to the stock market
- Returns often outpace inflation
Cons
- Often underperforms stock market in the long term
- Comes with additional costs, including taxes, insurance and maintenance
- Often not very liquid
7. Broad ETFs and Index Funds
Risk Level: Moderate
The star of Clark’s retirement investing strategy for most people is the target date fund. Barring that, he suggests splitting your funds between a total stock market, bond and international fund.
Clark’s general theme is to invest heavily in the future of the United States economy rather than in individual companies.
If you’re investing in a taxable brokerage account rather than in a 401(k) or IRA, you can buy an ETF that tracks, say, the S&P 500 fee-free.
This investment class is largely geared toward retirement. Clark doesn’t consider anything less than five years to even be an investment. He also says that true investing is at least 10 years.
These are set-and-forget type investments that you can draw down once you’re done with your working life.
Pros
- Much less risk than investing in individual stocks
- Built for retirement investing
- Inexpensive or free
- Can outgrow inflation
Cons
- Need a long time horizon
- Can be volatile from month to month or even year to year
8. Value Stocks
Risk Level: Somewhat High
Again, Clark doesn’t advise that you invest in individual stocks, at least at any significant percentage of your portfolio.
However, if you take a more active approach to investing and get into many individual stocks (instead of buying them through an ETF or index fund), you have a choice between value and growth stocks.
Benjamin Graham and Warren Buffett are two of the most prominent names in the history of value investing. It typically involves the fundamentals of a company and looking for undervalued stocks.
In other words, figuring out what a company should be trading for based on things like current revenue, profit and price-to-earnings ratio.
Value stocks are often larger, more established companies. That can mean more stability. During boom years for the stock market, these companies may not be as attractive as, say, hot tech companies such as Tesla and Amazon.
But they don’t pose quite as much risk because their prices tend to be more tied to their fundamentals than to future growth.
Pros
- Can be more stable and less risky than growth stocks
- Often are easier to evaluate in terms of stock price
- Can outgrow inflation
Cons
- More volatility than funds or ETFs
- Can underperform growth stocks during boom times
- Long time horizon
9. Growth Stocks
Risk Level: High
Most of the context around value stocks remains true here.
Growth stocks often don’t pay dividends, instead putting the money back into their companies. They also can trade at a much higher multiple of revenue.
These stocks often are more volatile than value stocks because they’re often priced more on future potential earnings than on current revenue and profit margin.
Tech stocks and younger companies often fit into this category.
It’s probably worth mentioning that stocks are historically overvalued as of the first quarter of 2022. That means they’re trading at a much higher share price relative to earnings than they have in the average year.
Pros
- Can outperform value stocks during bull markets
- Often exhibit higher upside than value stocks
- Can outgrow inflation
Cons
- More volatility than funds or ETFs
- Can underperform value stocks during bear markets
- Long time horizon
High-Risk Bets To Make Only in Specific Circumstances
10. Crypto and NFTs
Risk Level: Extremely High
Clark has been clear and consistent with his stance on cryptocurrencies. He says they’re “totally a gamble” and “completely like going to a casino.”
However, in a general sense, Clark has always allowed for things such as crypto and NFTs as part of your portfolio, even if he doesn’t recommend it.
He’s a fan of Charles Schwab’s “core and explore” philosophy. Essentially, invest the large majority of your portfolio into what Clark calls “boring” investments such as a total stock market ETF. Then take a small percentage of your investment portfolio — say, 5% — and put it toward more speculative plays if you must.
As someone actively involved with crypto and NFTs, I can say it’s an extremely risky space that requires a diverse skill set, a big risk tolerance and preferably lots of disposable income. In my opinion, it shouldn’t be part of almost anyone’s core holdings. But there are opportunities for huge upside, especially for those who are already taking care of all their other financial goals.
Pros
- Potential for extreme returns
- Additional diversification for high net worth individuals
- Doesn’t necessarily correlate with stock market
Cons
- Extremely volatile
- High concentration of scams
11. Angel Investing
Risk Level: Extremely High
You typically need to be an accredited investor to participate in angel investing. That means making at least $200,000 per year or having at least $1 million in assets excluding your home.
In other words, you have to be rich to invest in hot new startups in Silicon Valley. You also need to be highly connected to get early access to companies like Uber, Facebook or Airbnb before they go public.
This type of investing is also super risky. Even when it works, you often don’t see a cent of return for five to 10 years. But it can be as lucrative as anything outside of starting your own business.
Pros
- Potential for crazy returns
- Can be fun and exciting
Cons
- Restricted to the rich and well-connected
- Extremely illiquid
- Long time horizons
Final Thoughts
Clark says that your top investing priority is funding your retirement. That’s generally a long-term goal that takes most people decades to accomplish.
Although Clark has a good roadmap on how to save and invest, there are plenty of ways you can get professional advice on what to do with your money. One great place to start is the Garrett Planning Network. It provides fiduciaries who offer financial planning and investment advice on an hourly, as-needed basis.
