Cheddah, bricks, green-backs, dough, bread, cake, ducketts, dead-presidents … whatever you wish to call it. But in the investment world you rarely actually hold cash in your accounts, but rather “cash-like” instruments. Whether you choose a cash investment or just keep an extra amount stored in your checking account, it is a good strategy to always have enough cash on hand to cover at least three months of your normal expenses.
Money, Money, Money, Money ... MON-EY!
Here’s a brief overview of the universe of investment opportunities available, although eventually we will make a case that you will only need to focus on a few types of investments.
“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”
— Ayn Rand
The purpose here is just to establish a general knowledge of all investment classes that you will likely encounter including their benefits, risk/return characteristics, and tax implications … much of which will just be for your information since we will argue that you shouldn’t invest in many of these asset types. But, it’s better for you to know why you don’t want to invest in certain instruments, so take the time to educate yourself! If you are strapped for time or are afraid of reading, then just take in the summary bullet points of each investment type given at the top of each page. Read further if you care for more, and send us questions if you’re still scratching your head!
Each share of stock effectively represents a partial claim on the earnings or net income of the company (how much money the company is making after all expenses and interest payments to bondholders), and each share is given voting rights in helping to determine how the company directs their business.
The types of investments we have reviewed thus far are the ones you will most likely encounter or already have seen at this point in your investment life. The following is a list and brief description of other asset/investment types that you may find available to you, but in most cases, you should just ignore them.
Debt issued by corporations represents the largest type of fixed-income market based on total bonds outstanding. Investors demand a higher return on their loans to companies since they are much more likely to default on their loans (i.e. failing to pay interest or return the original amount of money you invested when the loan expires/matures) when compared to Treasury and Municipal debt
State and local governments (municipalities) also issue debt to fund projects and operations within their jurisdiction. The main attraction to municipal debt is the tax advantage received by high-income investors. Interest received from municipal bonds is exempt from federal income tax, and if the owner lives in the state where the bond is from then they in many cases do not have to pay state income tax either.
In order to finance the daily activities of the Federal government, the Treasury Department issues I.O.U.’s to investors and governments around the world. As of the end of 2019, the Treasury had more than $23 trillion dollars in outstanding debt obligations. Based on a U.S. population of about 330 million, this amounts to roughly $70,000 in federal government debt per citizen (gulp!).
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