Three Options for Your Money
There are three common places to put your money; cash, stocks, and real estate. You can also invest your money into a private business, but for this article we will focus on the three most popular options.
These categories can be broken down even further. Stocks have options, shorts, and longs. Real estate can be broken into residential, commercial, and Real Estate investment trusts (REITS).
When we say cash, we are referring to the amount left over after expenses are paid every month.
Cash is the default place to store your money, either in bank accounts or stuffing the money under your mattress if you’re into that. The reason this is the default option is because it’s the easiest thing to do. Money is deposited into your bank account from you source of income and you don’t need to do anything else.
This is also the most expensive place to keep your money because of the invisible tax called inflation. We recommend saving six to twelve months worth of living expenses, but anything over that may cost you.
The interest rate most banks pay for holding your cash is around .06%. If you saved $100,000 and kept it in the bank, they would pay you $60 a year. This is almost worthless. If you invested $100,000 in the bank in the year 200 and left it in there, it would be worth $101,206 by 2020 with a net profit of $1,206.
On average, annual rate of inflation is between 2 and 3%. This means, if a gallon of milk costs $1 today, it will cost $1.03 in one year.
In the year 2000, $100,000 had $148,000 of purchasing power in today’s world. That means we have seen 48% inflation in the last 20 years. In the year 1975, $100,00 had $476,000 of purchasing power in today’s world.
In our opinion, this makes cash the worst option for your money because every year you will lose 2-3% of the value.
For simplicity's sake, when we say stocks we will refer only to index funds and equities, not options or shorts.
In 1996, the S&P 500 was trading at $700. As of July 2020, while recovering from the corona virus sell off, it is trading at $3,053. This equates to a 6.5% return annual return. If you had invested on the worst day in 2007, you would have doubled your money by 2020. If you had invested on the lowest day day in 2009, you would have seen a 436% return.
Over a short time frame, stocks can be risky because of the volatility. However, if you have a time frame of 20 years or more you will drastically increase your odds. In fact, there has never been a time in history where the market did not significantly increase over a 20 year horizon.
We recommend stocks over cash.
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