This is the third blog post in the Classic Money Habits series.
Carefully Assess Your Risk
For real life examples of how to get the poorest returns on valuable assets, look no further than A&E’s The First 48. Follow homicide detectives as they race to find suspects within two days of a crime taking place.
The show often features people who don’t know what a reasonable rate of return is for the capital they put at risk.
In one episode, a man was shot and killed for $30.
There’s no dollar amount that justifies taking another person’s life. BUT, if you’re looking at robbing as a career option, then I forbid you to accept jobs that pay less than a half day’s work at McDonald’s.
The guy who took the victim’s life exchanged his freedom for the price of an irregular pair of brand name jeans.
Say what you will about crooked CEOs, but at least the upside to their misdeeds is high (millions of dollars) and the downside is low (a few years in prison).
We like to vilify credit card companies for charging “exorbitant” fees and interest rates to people with poor credit histories. I ain’t mad at ‘em.
They can’t offer their best deals to people whose money motto is, “I’m ridin’ around and I’m gettin’ it. It’s mine. I spend it.” No. That’s foolish.
Before you put your money at risk, ask yourself three basic questions:
- How much can I gain?
- How much can I lose?
- Am I happy with my answers to the first two questions?
Diversify Your Income
Having various sources of income softens the blow to your finances should one source dry up.
There’s been a lot of talk of passive income generation around the internet as of late. Regardless of what you’ve been told, making money this way isn’t easy. It’s attractive, but it ain’t easy.
There are products that “make money while you sleep,” but you’ll be wide awake when you create them and fully coherent when you market them.
Whether active or “passive”, it takes time and, often, hard work to set the different income sources up.
The simplest and quickest way for most people to expand their income is to use the skills and resources they already have.
For instance, I could use my CPA credentials to drum up accounting or bookkeeping work.
But you don’t need a professional designation to make extra cash.
I’ve blogged (obviously), land lorded, pet sat, and taken in boarders. As a matter of fact, I’ve got a job lined up this week to clean a friend’s recently vacated rental property.
While it’s important to derive income from several activities, an investment portfolio of several different asset classes is essential.
After all, you hope to use the income created by these assets at some point.
I can’t stand how financial gurus focus on the historic return rates of the S&P 500. True. Having your entire portfolio in an index fund or ETF (Exchange Traded Fund) that tracks the S&P 500 is better than socking away all your excess cash in put options on Groupon stock. But still, your assets wouldn’t be properly diversified.
You have so many vehicles to choose from. The following list doesn’t cover everything, but it gives a good idea of the option you have.
- Equities – Domestic, International, Small Cap, Mid cap, Large cap, Value, Growth
- Bonds – Corporate, Municipal, Treasuries
- Real Estate (direct ownership) Single Family Homes, Multi-family Dwellings
- Real Estate Investment Trusts – Apartment Building, Office Buildings, Hospitals, Restaurants, Strip Malls, Senior Living Facilities
- Cash – Savings Account, Certificates of Deposit, Money Market Account, Savings Bonds
One year, small cap equities may yield large returns. In another year, commercial real estate will shine. Putting money in numerous pots helps protect you against the whims of one type of investment.