All About Investing
Young Fools
March 25, 1998

Ways to Grow Your Money

Here's where we'll go over the nitty gritty of all your options -- all the ways that you can invest your money.

Check out the items below and you'll learn what bonds and money market funds and such are. We'll cover choices that offer you low returns, low risk, higher returns and higher risk. And then we'll end by jumping into the exciting world of stocks.

Bank Savings Accounts
Money Market Funds
Certificates of Deposit (CDs)
Bonds
Real Estate
Collectibles
Stocks

Bank Savings Accounts

While you probably don't have a stock-trading account at a brokerage, there's a good chance you do have a savings account a bank. If you don't, you should consider opening one. It's a great way to learn about interest as you watch your money grow through compounding. (And any money you're saving in a shoebox or your desk drawer might as well earn a little interest while you decide what to do with it.) How do bank accounts rate as investments, though?

A bank is a very safe place to keep your money, but bank savings accounts never offer a high rate of return. Even when interest rates are high, you can usually make more money putting your money somewhere else. Banks are the best place to keep money that you'll need to withdraw soon or regularly. But they are not the best place to put any funds that you don't plan on touching for a long time.

Money deposited into a bank account won't grow quickly, but it will grow a little. And sometimes that's what you need.

Money Market Funds

In a money market fund, the money you invest is put into lots of different short-term investments, like government bonds. It invests in things guaranteed by the U.S. government, so it's risk-free. (Unless, of course, the planet is taken over by aliens -- then maybe even U.S. bonds won't be safe anymore.)

A money market fund pays a little more interest than a savings account, but often not much more. It pays less interest than CDs or bonds. (These CDs aren't digital disks with music on them. Here, CD stands for "certificate of deposit.")

So what's a money market fund good for? Well, one good thing is that you can take out your money anytime, something you can't do with CDs or bonds without paying a penalty. So if you have some money that you plan to invest soon, you might want to keep it in a money market fund until you decide what to do with it.

You can invest in money market funds through many banks or through financial services companies like brokerages.

Certificates of Deposit (CDs)

Another place you can park your money is in CDs. With CDs, you put your money in the bank for a specified period of time -- usually several months or years -- and the bank promises you a certain rate of return, or interest. The catch is that you're supposed to leave that money there for the whole time. If you take your money out early, you pay a penalty.

What rate of return do CDs offer? Usually it's a little more than savings accounts. So if a bank is paying 5% interest for savings accounts, CDs might offer 6% or 7%, depending on how long you have to leave your money in the CD.

If you know that you will need to withdraw your money in a certain period of time, perhaps a year or a few years, you can consider investing it in CDs or bonds. Why? Because they'll pay you more interest than a bank account. But remember that these don't allow you to easily withdraw your money whenever you want. So keep that in mind and in some situations, money market funds might be a better choice.

Bonds

Bonds might be familiar to some of you. Maybe Aunt Myrtle or Uncle Floyd gave you some when you were younger. But what is a bond? Well, it's really just a loan. Instead of a bank lending the money, though, this time it's you lending the money. Governments and companies issue bonds to raise cash. Maybe your state needs some money to buy computers for schools. Or maybe a company needs money to build a new factory in Swaziland so that it can process peanuts grown locally into peanut butter. Bonds are one of the many ways that governments and companies can raise money.

With a bond, you pay a set amount of money, and whoever is issuing the bond promises to pay it all back to you on a certain date (maybe in one year, or twenty years, for example), with interest.

What's good about bonds? Well, you know exactly what you're going to get. And a bond pays more interest than your bank account. Why? Well, because if it didn't, then you'd probably just leave your money in the bank. Your bank account, remember, is virtually risk-free. But a state or city government or a company can run into financial trouble, and might not be able to keep its promise to you. There's always a chance that you won't get all your money. How do you know how risky any bond might be? They're all rated for you. Solid, dependable governments and companies get high ratings. Ones which are shakier get lower ratings. Bonds which are poorly rated usually have to pay a higher interest rate in order to get anyone to buy them.

Bond ratings look a lot like report cards. For example, if Super-Duper Corporation is a great company in fine shape, its bonds might be rated "AAA." But the Bell Bottom Company, which is raising money to try and turn itself around and not go out of business, might have its bonds rated "CC." Naturally, if they both offered the same interest rate, you'd buy bonds from Super-Duper. That's why Bell Bottom has to offer a higher return.

Have you ever heard the term "junk bonds?" Well, Bell Bottom bonds are junk bonds. There's a good chance you'll never get the money you expect. Why do people buy junk bonds? For the high interest rate paid. Super-Duper's bonds might offer 8% interest, but Bell Bottom, since it's riskier, might have to offer 14%. If Bell Bottom does pay you, you'll earn more than with a Super-Duper bond. But Bell Bottom also might go out of business and not pay you.

These are the kinds of decisions investors make. Do you want to go with a lower-risk bond that pays 8% or a higher-risk one that pays 14%? Or a bank account that's the safest of all, but pays only 3%... or a high-flying stock that might return 50%?

Understand that bonds offer a wide range of interest rates and risk. Not all bonds are alike.

If you're a young person who plans on letting your investments grow over many years, bonds are probably not the best place for you to park your money. Bonds with high ratings might be good for older people who have retired or will retire soon and can't afford to take any chances with their money.

Real Estate

A lot of people invest in real estate. It's definitely not an option for most young people, but let's quickly review it.

You may buy a house, maybe for $150,000, and a few years later, maybe it's worth $180,000. Wow -- that's a $30,000 profit, right? Well, not exactly. Sure, the house might be worth a lot more now. But if you want that $30,000, you're going to have to sell your home, pack up your things, and move somewhere else. Yes, a house is an investment. But it's one you usually live in, so it's kind of special. To make money in real estate, you often have to own several buildings or chunks of land.

You usually borrow from the bank to buy real estate. (A loan for a house or piece of property is called a mortgage.) Then you have to keep your properties in good shape, paying for repairs or doing them yourself. Every month you're slowly paying back to the bank the money you borrowed -- plus interest. And you're paying taxes on the properties, as well. And real estate comes with a bunch of risks and headaches, too. For one thing, what if the value of the property doesn't go up? Sometimes real estate prices drop, or stay depressed for a long time. Then you're stuck. If you need your money, you'll have to sell (or maybe take out another mortgage). What if no one wants to buy? Then you have to lower your price, and you end up losing money on the whole thing. Arghh!

So -- is it crazy for anyone to invest in real estate? Not at all. Many people make good money at it. But you have to know what you're doing. Buying one property to live in is another matter. People do that because it's usually better to buy housing than to rent forever. And hopefully, when the time comes to sell, there might be a nice little profit. (But maybe not.)

Collectibles

Collectibles are all kinds of things. Baseball cards, autographed books, Muppets lunch boxes, movie posters, coins, stamps -- even comic books. Some of them can end up being worth a lot of money. But it's hard to know exactly what will and what won't fetch much money in the future. Old baseball cards are rare, but today they're printing a lot more baseball cards than they used to. Chances are, today's cards won't be as rare and therefore probably won't be as valuable. If you bought a Cabbage Patch doll that sneezes for $25 and expect it to be worth $1000 in the future, you might be really disappointed. Maybe it will sell for... $25. You really have to know what you're doing to make money in collectibles. It's best to just collect for fun, not money.

Stocks

Check out our special collection on stocks.

All About Investing

Risk and Return
The Rule of 72
Ways to Grow Your Money
Ways to Lose Your Money