By Gary, on August 31st, 2009
“Your Money has a Job in a Financial Institution!”
Financial Institution: Wikipedia defines this term as “an institution that provides financial services for its clients or members.” Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government bodies.
Broadly speaking, there are three major types of financial institutions:
- Deposit-taking institutions that accept and manage deposits and make loans (this category includes banks, credit unions, trust companies, and mortgage loan companies);
- Insurance companies and pension funds
- Brokers, underwriters and investment funds.
For Part A we will deal with financial institutions. These institutions are not hard to find or deal with. They are your local banks or credit unions. You can set up accounts at their physical facility, on their web sites, or by calling them on the phone.
We’ll work with the other financial institutions in future articles – don’t worry.
Note: You must have discretionary income to Invest.
Discretionary income is the income after subtracting taxes and normal expenses (such as six-months of saving, housing, utilities, insurance, credit card and other loan payments, medical, education, transportation, maintenance, child support, inflation, food, entertainment, and everything it costs you to maintain your standard of living). Unless you are comfortable with cutting costs so you can invest and grow your wealth, I do not recommend setting yourself up to quit investing. Therefore, make sure you are using discretionary income to invest.
This is the extra money you have to either play with or invest. This varies with each person and each household. If you want to build wealth, you must have:
PLAY MONEY = MONEY TO INVEST = Gross income – taxes – saving – standard of living costs
You earn money by placing your discretionary income into the hands of other responsible parties and they pay you to use your discretionary income. This is your return on investment. It can create money for you in several forms: interest, dividends, capital gains, tax savings, etc.
Investing is a very broad, complicated category. Investing in its most basic definition is taking your discretionary income and putting it into something or, giving it to someone for the purpose of having the “something or someone” make a return on your money.
There are many investments and they vary greatly in…
- Risk to reward ratio.
- Minimum investment.
- How they pay you.
- The amount of expertise required to participate in them.
Investing “Vehicles” Part A: What can I use to Help my Money make me Money:
This will be a short, simple list you can use. It will be limited to the basic financial investment vehicles. As you build your wealth, you will be able to flex your financial strength by using experts in the other investment arenas to assist you in building your wealth to where you want it.
Savings Account (Yes, Savings = Investing)
- FDIC Insured.
- Your Bank or Credit Union has these available for minimal upfront cost.
- The interest that you earn is usually small (but greater than zero).
- You can usually set this up to be funded on a regular basis from your checking account.
- This is very liquid and easy to get to.
- Self discipline is required if you want your savings to grow.
- You most likely will not be able to use your savings account as a checking account.
- FDIC insured.
- These are available from financial institutions at a slightly higher upfront cost.
- The interest or dividends that you earn is usually set up and understood at the time you invest.
- Money Markets are less liquid and there are rules up front on when you can cash it in.
- At a reduced interest rate, these can be set up to have checks written against the account (this defeats the investing purpose we are talking about and is not recommended).
Certificate of Deposit (CD)
- FDIC insured.
- These are available from financial institutions at set upfront costs.
- They are a short-term or medium-term interest bearing instrument.
- CDs offer higher rates of return, but lock up this money for the duration of the CD’s maturity. Money removed before maturity is subject to a penalty.
- CDs are low risk, low return investments, and are also known as “time deposits”, because you have agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years.
- CDs are not liquid during their term. So, you must be ready to not use those funds until the CD matures.
Topics to be covered in the next parts:
Mutual Fund market
Foreign exchange market
Benefits of Investing:
- Earning is basically not dependent upon your skill, education, experience or locale.
- You do not need to work for anyone to do this.
- The benefits are all financial.
- Not much time is required on your part.
- Just decide how much you can invest, what you want to invest in, and who you trust to make your money grow.
- Then, you give your disposable income to them, sit back, and watch it grow.
- Do it over and over again on a regular basis and watch your wealth grow even faster.
- The benefits are not immediate. They take some time to take hold for you.
- You need patience and trust.
- You will have to do without the disposable income that you have dedicated to the investment.