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© 1999-2007 by Marabella Books

 

 

 

 

 


Cash, Stock or What?

By now you’ve gone through your budget and have decided that you have all the things you need  -- for the time being.  Now, it’s time to begin saving and investing for the “high ticket items” you will need in the near and distant future.  Determining whether you save or invest your extra money depends on how much you need your money to work for you and over what period of time.  In other words, you need to determine how you can reach your goals with the least amount of risk using cash, bonds, stocks or some combination of all.

Cash

If you keep your cash under the mattress, in a shoe box, under your bra strap or in a passbook savings account, you do not risk a loss in value over the short term.  Cash should be in everyone’s portfolio for gifts, new investment opportunities, emergencies, charitable contributions and to help you feel financially secure.  The problem with keeping too much cash for too long is that the value of your dollars will lose value over the long term due to increasing prices. (Have you checked the price of gas lately?)

Bonds

In the simplest of terms, a bond is a long-term debt investment.  In this case debt is good, because you make an investment and someone else owes you.  A bond can be issued by a local government, the federal government or a corporation.  When you purchase a bond, the issuer is obligated to pay you back in a certain period of years, and pay you interest at regular intervals or when your original investment is returned.  In a strong economy, bonds tend not to pay high interest (currently between 6 and 8 percent, though rates vary), but may be high enough for you.  (Interest rates and economic conditions will be discussed in subsequent articles).

Stocks

If you want to be an owner of a company that is not yours, you can buy stocks if the company issues stocks to the public.  A common stock holder has voting privileges and is entitled to profits if the company pays out earnings to its shareholders.  Unlike cash, you may lose short-term and long-term value, depending on the company’s performance.  Unlike bonds, the company is not obligated to return to you the amount you invested (the principal).  Yet, unlike cash and bonds, your investment may have the potential to appreciate in value over the short and long term.   If at any given time you feel uncomfortable with the loss in value of your investment, stocks are not for you.  Of course, you can learn to feel comfortable with momentary losses in value.  There may be a pay-off if you can come to grips with uncertainty.

How do you decide whether to keep your cash (save), or put it in bonds, stocks or both (invest)?  Answer this question: If you keep your cash cash, and continue to add your extra dollars to it, will you be able to fund the purchase of a residence, commercial property, a college education, retirement, or something else you want in the time frame you’ve set for yourself?  If the answer is yes, then you can keep your cash cash.  If the answer is no, it’s time to consider investing in bonds, stocks, or some combination.

Copyright © 2000, Marabella Books