Investment vehicles: These are not modes of transportation that you use to get to the bank.
When you save, you want something that will earn you the most amount of money for the time you will not have access to it. What does that mean? Saving on the consumer side is LENDING the money to an institution for their use for which they will pay you a percentage of what you loan them. When you put money into a savings account, the institution will say, “Thank you!” and use your money to help someone buy a car or a 1st house or add a deck. Sounds like a good deal doesn’t it? You’re not currently using the money, so your money is making money. We like that! So how much does it make at the Bank? It depends on the bank of course. If you invest $1000 in a savings account for a year, you should expect to have between $1001.70 and $1010 by the end of the year. The inflation rate is approximately 3%, so at the end of the year, something you could buy for 1000 now costs $1030. Congratulations…You just lost money. Oh really? What is a current car loan now? Not that 0% for 60 months if you qualify for our super duper loan which, of course, you won’t. The one where you pay 60 months for a car that loses a considerable amount of value just driving off the lot. The consumers that are using the money the bank has borrowed from you are paying 6-12%. You are receiving less than 1%, and in some cases, less than .2%. That means they are making from 5.8% to 11.8% on money they are paying you .2% to use. Nice profit. Real life example:
John and Mary put their $1000 in the bank along with 20 others. The bank now has $20,000 to loan out. (There are reserves that need to be met and all sorts of government regulations so no, they don’t get the whole $20,000, but for the sake of simplicity, let’s just assume they can do this.) Bill and Sue need a car, so they go to this lovely bank and get a $20,000 loan. Over the life of this loan (60 months at 5.48%) they will pay $2910.32 in interest to the bank. Over the life of the loan, the bank will pay $8.50 to each and every person that contributed $1000 to this loan or $170 total. That’s a nice profit– $2700 roughly. This is a SAFE place to put your money. Now this is important! The SAFER your money is the LESS money you’ll make, and the MORE likely you are to LOSE spending power. Well, what about a CD? Current rates for those are 0.25%. They are less liquid, so if you put your money in there, and you want to take it out, they will charge you a significant fee. Money Market rates are running about .85% to 1%. Those are more liquid than CD’s but not as liquid as a savings account. How then do you save your money and not end up losing it?
You must look at this money as a way to purchase an asset that pays you money. So…what is an asset? It is a product or service that brings money into your pocket. So when the insurance man says that your house is your biggest asset, he doesn’t know what he’s talking about. Wait… What? Well, let’s look at a house. When do you stop paying for the house? When you finish the mortgage? No, you still must pay taxes, maintenance and repairs on it as long as you have it. Which way is that money going? Into your pocket our out? But the house appreciates doesn’t it? Well, does it? If it is appreciating, when do you collect the money it is earning you? You pay More taxes on it as it appreciates, and of course, because it is getting older, the repairs are More expensive. How much money are you making on it now? More money is running out than in. You collect on the appreciation when you sell the thing. So your house is an asset when you no longer own it. Profit Potential doesn’t buy movie tickets. How can you make it an asset? You can reduce how much you pay in taxes by declaring part of your house an office for your independent business. You could rent out the basement to a struggling rock band for practices. You could call it a Pet Motel and watch people’s pets when they’re on vacation. You can give tours of your house and charge the curious onlookers; you could rent out rooms to college kids; you could charge your kids for room and board after they graduate from High School…The point is, you have to offset the money you pay in mortgage, repairs and maintenance with other people’s money.
I would highly recommend you read Kiyosake’s Cash Flow Quadrant. Study it. Inhale it. Wear it out.