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Ever have friends saying they’re looking to invest their money, only to realize their so-called investment is just chilling in a savings account? Well, newsflash! That money is already playing the investment game, albeit a really boring one.
Let’s dive into the three-ring circus of investment factors:
Here’s the scoop: An investment means you've stashed away some dough for future use, hoping it will multiply like rabbits in a magic hat. From baseball cards to real estate, anything can be an investment—yes, even that dusty stamp collection from Aunt Gertrude.
1. Rate of Return: What’s your money’s potential to sprout and grow? For instance, the stock market is like a wild roller coaster with a long-term average return of 7%. A savings account? Well, it's like a kiddie ride—safe, predictable, and currently around 1%.
2. Risk: How likely are you to get that sweet, sweet return? Stocks are risky, like juggling flaming swords. If you bought stocks in early 2008, you probably felt like you got hit by a pie in the face, losing 40% of your money. Savings accounts, on the other hand, are as risky as a pie-eating contest—steady and safe.
3. Liquidity: How quickly can you access your cash? Savings accounts are super liquid—you can get your money faster than a clown can pull a rabbit out of a hat. Stocks are less liquid but still manageable. Real estate and CDs? Let’s just say you’ll need Houdini-level skills to get your money out quickly.
Savings accounts score high on all these factors: they’re liquid, low-risk, and offer a teeny-weeny return.
Now, let’s compare this to other investments. An index fund of American stocks is like a well-trained circus troupe: liquid, moderately risky, and offering a medium return. Vintage baseball cards? Picture a clown car: fairly illiquid and moderately risky but potentially rewarding. CDs are like the carnival games: illiquid, low-risk, and low return.
So, where should you throw your money? Here are a few tricks:
– The sooner you need the cash, the less risk you should take: For retirement, juggle some risk. For a car in six years, accept some risk. For an AC repair in five months, avoid risk like a mime avoids talking.
– Need quick access? Keep it liquid: Your emergency fund shouldn't be tied up in real estate or collectible dolls. Those are for long-term goals, not for when your car breaks down in the middle of a clown parade.
– Need a certain amount by a specific time? Lower the risk and increase savings: If you have to pay off your ARM in four years, don’t gamble it on the stock market. Opt for a safer investment and focus on saving more.
Rate of return rarely steals the spotlight: I focus on liquidity and risk first. Once those are sorted, I find the best return for that level of risk and liquidity.
That’s why, quite often, savings accounts are my go-to investment vehicle. They may not be thrilling, but they’re dependable— just like a trusty unicycle.
