The Three Considerations for Making All Investment Decisions
Over the past month we have been discussing the new location, location, location as it relates to your cash and cash flow. We have already broken down the different types of investing we do with money: investing in personal debt, investment debt, and investment assets.
But how do we know which of these is the best place to invest our hard-earned money?
The three considerations for making investment decisions:
- Safety: When investing your money, you want to know how safe it is. Meaning, what are the chances of losing my money and never getting it back? For example, investing in paying back credit card debt is extremely safe. If you write a check for $3,000 to pay off your $3,000 balance, you can be certain your new balance will be $0. You may not be creating wealth, but it’s safe and predictable. Investing in a savings account is considered very safe, while aggressive stocks can be considered less safe due to the fact you could lose your money all together in return for a potential high rate of return.
- Liquidity: The second key consideration is liquidity. How easily can you get to your money when and if you need it? Paying off the $3,000 balance on a credit card is extremely liquid, as you immediately have access to that money again for your “convenience”. Money in a savings or checking account is also very liquid, as you can get that money in hours or even minutes from a local ATM machine. Stocks, bonds, and real estate can take on varying degrees of less liquidity due to the time it might take to sell or cash in to get your money back.
- Return: If you are going to invest money, you want to know the rate of return you can expect. By paying off the balance on a 12.49% credit card, you return on investment is easy…12.49%. If investing in the stock market, you might lose 10% on your investment or gain 10%, while a money market account or CD at your bank might be very safe, but only provide a very low rate of return.
View the helpful table we have included to compare some different types of investments in relation to safety, liquidity, and return. Our goal is to help you think clearly and confidently when faced with decisions on where to invest your money. Whether you save $100 each month, receive a $2,000 tax refund, or gain $50,000 from the sale of a house, you need to make SMART decisions on where to locate your money.
If you have questions on how your real estate and mortgage fit into all of this, contact us. This is our unique specialty in helping homeowners maximize all three of these considerations when it comes to your real estate.