MORE Things You Can Invest In

When you think of “investing”, what do you think of? If you’re like most people, you immediately think “the stock market”. Did you know that there are so many other vehicles for your investment money?! 😲🤯

Some of them are terrible ideas but fun to talk about- cryptocurrencies, anyone?- and some are really good options. Last time, we talked about Stocks, Bonds, Mutual Funds, Options, and Cryptocurrencies 💵

Now let’s wrangle up some more investment vehicles:

Savings Accounts, Money Market Accounts, and CDs

This is… not what most people think of when they think “investment” 😳

What they are: When you save your money in a savings account at your bank, your bank will often reward you with interest earnings. A money market account is similar, with often twice as much interest as a savings account. (Note that going from 0.1% to 0.2% is not that impressive) 😂

A CD is a Certificate of Deposit: you deposit money into a certificate held by your bank- and promise not to withdraw that money for a length of time, from 3 to 24 months- and your bank will reward you by promising you a certain amount of interest earned.

If you remember from our last article, a CD may sound similar to a bond. A CD is essentially a loan to your bank, while a bond is a loan to the government, a company, or other entity.

Usage: Very Common. Many people own accounts like these, but not for investment purposes. Savings and money market accounts are great vehicles for holding your emergency funds. CDs are less liquid; the best thing about them is you won’t lose dollars in them (but you will lose earning power, since they earn less than the rate of inflation at this time.) 😖

Potential Risk: Very Low*. There’s no way to lose your money in these, unless your entire bank fails. Even then, FDIC (federal insurance for banks) will protect some or all of your money.

Potential Reward: Very Low. The interest rates on these vehicles are laughably low. They are useful tools for short-term savings, but not for growing wealth.

In the heyday of the 80s, with exploding interest rates, inflation was 14%- but interest on your CD could have been 18%, so your money was still growing faster than inflation 📈

These days, inflation is low- only 1%- but CD/money market rates can be as low as 0.1%. That means that when you put money into these vehicles, your wealth is going to grow slower than inflation, and you’ll lose earning power over time 😬

Annuities

What they are: Annuities are somewhat complicated policies issued by a life insurance company. You pay into your annuity for years, and when you retire, you receive an income for life. It creates a stream of income that cannot be outlived; annuities are complex because the kind of math required for those calculations is super complicated! 👨‍💻

There are advantages and disadvantages to annuities, of course, but since the top fear of most Americans is “running out of money in retirement”, an annuity can be a great investment 😁👍

Usage: Common. A pension is a type of annuity; so between public-sector employees who generally earn pensions, and investors who own private annuities, 63% of Americans own an annuity

Potential Risk: Low. Most annuities protect your money against loss. Variable annuities are linked to the stock market, so the potential risk on those is High.

Potential Reward: It Depends. Fixed annuities grow based on a fixed percentage, so their growth can be Low; index-linked annuities have Moderate growth potential.

Variable annuities are linked to the stock market, so they have High potential for growth, but high potential risk as well. Personally, I think that the purpose of an annuity is to reduce your risk of losing money in retirement, so these vehicles are certainly not appropriate for everyone! But annuities of all types have certain tax advantages, so ask your money person about an annuity option that might work for your goals 🤔❓

Life Insurance

Wait a minute, life insurance isn’t for investment, right? Au contraire, my friend. “Permanent” life insurance policies accrue value over time, and you can tap into that value- tax-free!- in your retirement 💰

What It Is: Life insurance is a policy that you buy, that will pay you a large sum under certain conditions. In the past, “certain conditions” meant one thing- you are checking out the grass from the wrong side! 💀😲

These days, though, you can get the “new kind” of life insurance- it pays out under three different conditions. First, it’ll pay you when you push up daisies. Second is the investment side- you can get paid tax-free retirement income. Third, if you have Living Benefits, your policy will pay you a lump sum of tax-free cash if you live through a major medical event (heart attack, stroke, cancer, ALS, etc, to name a few) 🤯

Usage: Common. Like savings accounts, most people own life insurance- but not for investment purposes. This use of life insurance is becoming more common, as investors become more educated about both the availability and the usefulness of tax-exempt investments, as well as the Living Benefits side of things 😁

Potential Risk: It Depends. Many life insurance policies, like annuities, protect your money against loss, so your risk can be Very Low*. (You are investing in a product- life insurance- not a gamble- the stock market.)

Variable life insurance policies also exist, and since they are linked to the stock market, the risk on those is High.

Potential Reward: It Depends. Like annuities, your life insurance can be a fixed account that accrues a fixed percentage, so its growth can be Low; but index-linked life insurance accounts have Moderate growth potential. Combine either of those with tax-free distribution, and you can have a fine return on your investment, indeed 💸
Variable life insurance policies are linked to the stock market, so they have High potential for growth, but high potential risk as well.

The last one for today is Personal Investments, and those can be really fun:

Personal Investments

Let’s say you, or someone you know, wants to start a business. How do you get startup capital? Public and bank business loans are available, but it can be really difficult to be approved for one- and even more difficult to get good terms on a public/bank loan! A better option is personal investment.

What They Are: A personal investment is when you borrow money from a friend or family member in order to start or expand a business 👭

Usage: Uncommon. There are 30.2 million (!) small businesses in the US today, but only a small percentage of them require loans for startup or expansion.

Potential Risk: High. Unfortunately, most small businesses shut down within 5 years of startup 😥

Potential Reward: It Depends. When loaning money to a friend or family member to start a small business, most people charge a small, fixed interest rate on the loan, so the reward would be Low to Moderate. Other business loans are structured so that the loaner owns a portion of the business; if the business does well, the reward can be Moderate to High- but this is a very rare occurrence 😬

That’s all we have time for today- I know I promised more, but I think this is a good bite to chew on, yes? Next time we’ll discuss a few more investment options, like futures, real estate, etc; as well as a brief discussion of how to evaluate which types of investments are right for you.

There is a wide variety of investment options available to you. A diverse portfolio protects you against risk. Always discuss your goals with your money person, and make sure your investments are right for you ❔👍

Now That’s Smart Money 🧐

Very Low* Explanation: Ethically, I cannot describe anything as “Zero” risk, because there is an extremely small- tiny- miniscule chance that the company you invest with could fail altogether. This is rare for a major company- ever heard the phrase “Too Big To Fail”?! 🤔