There are five basic ways to invest money: putting it in a saving account or something similar; buying collectibles; buying apartment or a house; buying bonds; and buying stocks. Let’s examine these one at a time.
Saving Accounts, Money-Market Funds, Treasury Bills, and Certificates of Deposit (CDs)
All the above are known as short-term investments. They have some advantages. They pay you interest. You get your money back in a relatively short time. In savings accounts, Treasury bills, and Certificates of Deposits (CDs), your money is insured against losses, so you are guaranteed to get it back. (Money markets lack the guarantee, but the chances of losing money in a money market are remote.)
Short term investments have one big disadvantage. They pay you a low rate of interest. Sometimes, the interest rate you get in a money market account or a saving account can’t even keep up with inflation. Looking at it that way, a saving account may be a losing proposition.
Inflation is a fancy way of saying that prices of things are going up. When a gas goes $1.10 a gallon to $1.40, or a move ticket from $4.00 to $5.00, that’s inflation.
Another way to look at inflation is that the buying power of the dollar is going down.
In recent times, inflation has been running just below 3 percent, which means for every dollar you own, you are losing three cents every year.
This adds up very quickly, and in ten years, at the present rate of inflation, all your dollars will have had thirty cents taken out of them.
The first goal of saving and investing is to keep of inflation. Your money’s on a treadmill that’s constantly going backward.
In recent years, you had to make 3 percent on your investments just to stay even.
Money markets and saving accounts often don’t pay enough interest to make up for the losses from inflation.
And when subtract the taxes you have to pay on the interest, money markets and savings accounts have been losers in at least ten years out of the twenty.
That’s the problem with leaving money in a bank or a savings and loan. The money is safe in the short run, because it’s insured against loss, but in the long run, it’s likely to lose ground against taxes and inflation.
Here’s a tip-when the inflation rate is higher than the interest rate you are getting from a CD, Treasure bill, money- market account, or a saving account, you are investing in a lost cause.
Savings accounts are great are great places to park money so you can get at it quickly, whenever you need to pay bills. They are great places to store cash until you’ve got a big enough pile to invest elsewhere.
But over long periods of time, they won’t do you much good.
Collectibles can be anything from antique cars to stamps, old coins, baseball cards, or Barbie dolls. When you invest your money in such things, you are hoping to sell them at a profit in the future.
There are two reasons this might happen: The things become more desirable as they get older, and people are willing to pay higher prices for them; and robs cash of its buying power, which raises prices across the board.
The trouble with investing in things is they can get lost, stolen, warped, stained, ripped, or damaged by fire, water, wind, or in the case of antique furniture, termites.
There is insurance for some of this, but insurance is expensive. Things general lose value with wear and tear, although they also increase in value as they get older.
That’s the constant hope of collectors, that the age of the thing will raise its price more than the condition of the thing will lower it.
Collecting is a very specialized business, and successful collectors are expert not only in the items they collect, but also in the market and the prices.
There’s a lot to learn. Some of it you can pick up from books, and the rest you can get the hard way, by experience.
Lesson one for all potential collectors, particularly young collectors, is that buying a new car is not an investment. The word “investment” showed up in a recent TV ad for a car, but if you see this ad, don’t be swayed by it.
Antique cars are investments, if they are kept in a garage and rarely driven, but new cars subjected to everyday use lose their value faster, even, than money does.
Nothing will eat up your bankroll faster than a car will unless it’s a boat. Don’t make the mistake that Bigbelly did.