When it comes to investing for incomes, one thing too many people forget is to first define what they want their money for.
They've worked hard, saved up the cash, and now they want to do something with it, and hope they can maybe us it to make a killing.
The first step is to decide what you want to use the money for.
How Soon Do You Need the Money?
Retirement?
Then it's long-term money. This is true even if you're close to retirement, or just went into it.
People live a lot longer these days. Don't look at age 65 as some kind of blank wall or the end of a long race. It's just the beginning of the rest of your life. And chances are good that could last twenty years. If medical science continues to advance and you have healthy habits, you could live past 100.
So you goal is not just to reach retirement, but to live well throughout it.
If You Want to Spend It In Under 20 Years . . .
Is this money you've saved up for a more short-term goal?
Perhaps you just want to know you have money in the bank in case you're laid off. It's smart to have such an emergency fund.
A downpayment on a house? A vacation? A wedding? A baby on their way? College or other school or training?
All of the above are short-term goals. The stock market is far too risky for any money you will need or want soon. Some experts say five years -- I say twenty.
Just look at a long-term map of the stock market, such as this one:
stockcharts.com/charts/historical/djia1900.html
The Stock Market Fluctuates Too Much
Now compare the current Dow Jones Industrial Average. As I write in early August 2010, the Dow is still where it first broke in the spring of 1999. That means it's gone nowhere for over eleven years.
Yes, it was over 14,000 in late 2007, but went down to below 7,000 in March 2009. And now is back to spring 1999.
Is that what you want for your short term money?
Only Long-Term Investing is Real Investing
Do not even think of "investing" your short-term money. That's erroneous terminology that can lead you into making a costly error in how you handle it.
In the Short-Term, You're Storing Your Money
You're "storing," just like you would store furniture for the short term if you have to move overseas for a year or two.
You're not concerned about making a profit, only on getting your furniture back when you need it.
Care About the Return of Your Money, Not the Return on Your Money
That's your short term money concern -- getting it back in full. It'd be nice if we could earn a lot higher rates of interest from certificates of deposit and money market accounts but, before you get all misty-eyed about the days of 18% interest rates, remember that the overall inflation rate was around 20%.
A college education for your children is a more complicated issue. There are laws allowing you to set up tax-deferred funds, so you should check out all your options. But if the child is in middle-school, I recommend you get the money out of stocks.
Same thing goes for money you want to devote to paying future healthcare costs.
For the long-term, my absolute choice when investing for incomes is to buy up good stocks that pay dividends and bonds that pay interest.
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