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Your Shrinking Pile of Money
This is the second article in the get money series. Now that you understand how money works in our current economic system, we’ll take a look at how we can use this to our advantage. From the get money article, you should realize that just by having money, it’s already depreciating at a rate of about 2-3%/year – if you’re living in the US that is. In some third world countries, that number is probably more like 80%/year. If you ever drive across the border of one of these countries, you’ll see signs offering “suckers” something like 50% interest/year! That is why you should be extremely worried if you ever hold a large amount of money in your hand. If I just won like a million dollar poker tournament or something, my first thought would be “Crap, I’m losing like $82/day!” Well, right after I think about the 350k that would go to taxes
Where to Put Your Pile of Money
Okay, so now that you are holding a shrinking pile of money, where do you put it so it would stop doing that?
Keep Holding That Pile of Money
This is the option to take if you plan on doing something with the money in the very near future. You let your money shrink a little, but it doesn’t matter so much because you are only holding it for a very short time. For example, you take out $100 to buy groceries, which you plan on doing in a day. Your money is now worth $9.99, but that can get you pretty much the same amount as the $100. This is the most liquid form of the money – you can use it right away without having to do any extra work. This applies to whether you’re holding it as cash or a checking account (with or without a very low interest)
Keep That Pile of Money In a Savings Account
A good place to put it if you’re still deciding what to do with it or will use it soon. It’ll slow the depreciation of the money somewhat, so it’ll buy you more time to figure out how to stop the leaking. For example, if you plan on doing grocery shopping in a couple weeks, or you’re trying to decide what kind of investment to put your money into. It’s not as easy to get to as money on hand since you’d have to withdraw it, or transfer it to a checking account before it can be used in most cases. It’s still quite liquid though.
Lend Your Pile Of Money to Someone (Bonds)
Not sure what to do with your money? Give it to someone who does! People need money for all sorts of things, and they’ll pay you to get it now (while they don’t have anything liquid). Typically, this is around 8%, depending on how trustworthy the guy you’re lending your money to is. For example, if you buy treasury bills (lend money to the US government), your interest rate might only be around 5.5%, while if you lend it to a company about to go bankrupt, you might get an interest rate of 18% (good luck getting your money back though).
Now, your pile of money will actually grow if you leave it alone, as opposed to shrink. However, you’ve now taken on some risk, and it’s for that risk that you get the extra money. If you adjust your earnings for the risk (of the guy you’re lending it to going bankrupt), it should still be [[positive expectation]], and that’s what’s important. Granted, you should [[diversify correctly]] so you don’t lose all your money in case the guy you lend it to does go bankrupt, which I’ll cover later in this series.
Another reason why you’re getting paid extra is that the IOU you hold isn’t as liquid. Your local supermarket won’t accept that bond for an apple, so you’ll have to liquidate your bond by selling it to someone else who’s willing to lend that money (to the guy you lent your money to) in order to buy your apple.
Put Your Pile Of Money Into a Business (And Borrow Somebody Else’s Pile of Money Too!)
So why would anyone pay you extra to borrow money from you? If you’re lending money to someone and they’re paying you a premium for that money, what do they get out of it? Well, they could be using it to repay another obligation, or the more common case – they think they can make more money with the money you’re lending them than the interest they’re paying you! Yup, 8% is chump change to them. They think they can make 10%, or 20%, or maybe even 10000% – and they’re right!
How do they do this? Well, they find someone who wants something done, and they use that money they got from you to do it. Then, they get paid by the guy they did stuff for, and repeat. That’s basically what business is (a job is actually a specific form of business). Doing so, people can make much more than the 8% they borrowed the money for.
There are two ways to get on board with this. First, you can start your own business by thinking about business ideas. Once you figure out something people want, simply figure out a way to give it to them. Plop that pile of money you borrowed into that idea, and reap the rewards.
If that’s too complicated, then you can try joining a business that already exists. There’s many ways to do this. You can find a partner with an idea and join form a corporation, buy some stock of a company you like on the stock exchange, or even just do your job where part of your pay is stock options.
This is the way pretty much everyone rich person you know got rich. There is no money sitting around depreciating (well, if it’s sitting around, it’s until you use it for something your business needs). Most of the money is stuck in an asset that just grows itself. Isn’t it great to have your pile of money expand and expand faster the larger it is?
Obviously, your money is not at all liquid here. You can’t even sell it easily to someone because not everything thinks the business is worth the same amount. It might take you months or years to turn your business into cash, but why would you want to? It takes a lot of effort to convert your shrinking pile of money into the expanding pile of money!
This is a very easy thing to see if you just look at the richest people in the world. How many billionares sit around with large shrinking piles of money for a long time? I can tell you without looking – zero! If they have any kind of a pile, you can bet they’re trying to figure out where to put it so it would stop shrinking.
In my next article about money, I’ll talk about why you should start investing as soon as possible. It’s extremely important to start saving money today.
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