Getting Your Money To Work For You

To earn money with money, you must place that money at risk. When I talk about earning money, I am talking about increasing your purchasing power. This is an important concept to understand.

For instance, a bank earns money by lending.  They determine the likelihood of getting paid back by a borrower, and assigning a risk assessment – the interest rate – to that borrower. They can earn money on that borrower, or they can lose it all.

Where does the bank get its money to lend? There are a number of sources.

You are the number one source.  When you make a deposit at your bank, you’re making a deal with them: In return for giving them your money, they promise you will get it all back. The bank buys an insurance policy for your money (FDIC insurance) then lends it out.

If you want to have 24/7 access to your money via a checking account (technically called a Demand Deposit Account), they won’t pay you any interest. If you agree to some restrictions in a savings account – such as maintaining a minimum balance – they’ll pay you a bit of interest. If you’ll lock your money in with them via a CD for a considerable period of time – usually a year or more – they’ll pay you a decent interest rate, historically much better than a regular savings account (although that’s not the case right now). It’s cheaper for them to give you some money rather than having to hunt around for other dollars to lend out.

A bank can also get money to lend by issuing stock. You give the bank money in exchange for an ownership interest in the bank. You can make money in two ways: The bank may pay a quarterly dividend and the value of your stock can increase.

There’s a catch, though: Your money is totally at risk. If the bank goes belly up, you can lose your entire investment.

Finally, a bank can issue bonds. In this case, the bank is the borrower, and agrees to pay the investors a set interest rate over a set period of time, usually 10 to 30 years. While your invested money is at risk, you are considered a secured creditor, and get your money back first from the sales proceeds if the bank collapses.

Note:  You may have recently heard the term, “bail-ins” (as opposed to bail-outs).  In short, when you make a deposit with the bank, you are considered a creditor.  An unsecured creditor.  Unsecured creditors get paid last, if at all.  The law now makes it illegal for the government to bail-out banks that fail.  If losses from a closed bank exceed the FDIC guarantees, all of your un-guaranteed money is at risk of being taken to pay the secured creditors.

There are a number of nuances and exceptions, but this is the general structure.

When you place your money in a savings account or even a CD, you are not earning money per se, even when you’re getting paid interest on the account. You’re being paid an inflation hedge.

What? Take a look at any extended period of time, and look at the inflation rate. Let’s say it has been 4% over the period of time you review.

Now, look at the average savings rate. To just break even – to preserve your purchasing power – you need to make at least as much as inflation is taking, PLUS the amount you will pay in taxes on your interest income. If you’re in a 20% federal and state tax bracket, you’d need to make at least 5% on your money.

If you have $1000 in a bank earning 5%, you will earn $50 in interest, and pay $10 (20%) in taxes, for net earnings of $40.

The inflation rate being 4%, has reduced the purchasing power of your $1000 to only be able to buy $960 worth of goods today. That net $40 you earned in interest – bringing you back to your original $1000 – preserved your purchasing power.

How To Grow Your Money

Treading water – just earning enough to cover the bite of inflation – will get you nowhere.  Sooner or later, you just sink below the surface.

I do two things to stay ahead of the game:  I invest in tangible assets.  In my case, precious metals (PMs).  I also invest in myself.

Tangible Assets

I don’t look at PMs as an investment as much as I look at them as a hedge against inflation.

PMs are an odd bird. They can make you money by increasing in price, but there is a risk component that isn’t there with savings or CDs. You’re not guaranteed to get all of your money back. And like cash under the mattress, it can be stolen.

But unlike cash or stocks, you will never be totally wiped out. There will always be an intrinsic value to PMs.  Fiat currencies, such as the US dollar, have always – without exception – eventually become worthless.  It sometimes takes longer for some currencies to crash, but governments always devalue their currency so they are able to pay the bills.  Always.

Right now, I have my long-term “savings” into PMs. This is money I don’t intend on spending or needing over the next 36 to 60 months. In my opinion, the convenience and interest rates being offered by savings/CDs is not enough. Both are paying rates that are lower than the real (not government contrived) rate of inflation.

Like a checking account, every dollar in a savings/CD account is reducing your purchasing power.  The longer it sits in the account, the more purchasing power you lose, so I want to limit the amount of money in those types of accounts.

You may be hesitant to buy PMs.  They are volatile and absolutely carry risk.  Anyone who tells you differently is telling you a lie.

But they’ve done a damned good job of maintaining their purchasing power.

Here’s an example:  Back in 1964, a gallon of gas cost about $0.25.  That quarter contained 90% silver.  Today, with the “spot” price of silver being around $20 an ounce, that quarter contains about $3.50 in silver… about the cost of a gallon of gas.

If you were to buy one of those silver quarters today, it would be more than the $3.50.  The coin dealer has got to have a profit margin to stay in business.

So here’s what you need to determine:  Do you think inflation will continue to rise?  If you believe so, investing your free cash (money you don’t need for monthly living expenses or for other 3 to 5 year asset purchases such as real estate) might make sense.  As inflation rises, the value of precious metals rises in tandem.

A caution I give my PM store customers:  Don’t try and “play the market” – making a quick buck with PMs.  You’ll likely get burned.  PMs should be the bottom layer of a long-term investment portfolio, not your “mad money” to make a quick profits.

Investing In Yourself

Where PMs protect your money, investing in yourself grows your money.

If you were to invest money in a listed company on a stock exchange, you must trust that the management of the company is competent, and is not overly regulated by the state and federal governments.  Even as an owner via your stock holdings, you as an individual have virtually no control or input on how the company is run.

If you invest in yourself by starting your own business – even on a part-time basis – you have a HUGE incentive to see that business grow.  You truly understand the meaning of overhead, taxes, insurance, cost of goods sold, etc., because it’s YOUR money being invested.  Your effort goes into your pocket.

This is the dream of many urban and rural homesteaders.  They want the ability to earn a living on their own terms, not being required to punch-in to a time clock 5 days a week.

Perhaps more importantly, it also gives you the ability to do something else – develop multiple streams of income.  By not becoming wholly dependent upon a single salary from an employer, you can leverage your talents into multiple fields.

If you look at my bio at the bottom of this post, you’ll see I own 3 different businesses.  If one waivers or even crashes, I have the others to maintain my cash flow and asset accumulation.  Business number 4 is in the works.

Need motivation?  Pick up the book, “The 4-hour work week”.  Awesome book.  It shows you how to correctly build a business right from the start, and then leverage your time so you’re not chained to the business.

You’ll kick yourself for not starting sooner!

I think the biggest mistake most small business owners make is to draw money out of the business too soon.  With almost any business, you want to roll those dollars back into the company so you can buy more product, which will make you more money.  Invest in yourself.  It starts to snowball, and suddenly, you have an asset base that produces a nice return on your investment year after year after year.

My last piece of advice:  Don’t put all of your eggs in one basket.  Never, ever put every dime you’ve got into something.  Especially as a Baby Boomer, you have fewer years left to recover from a loss.

If you’re new to precious metals and entrepreneurship, start with small steps.  Get educated before you jump in, then adapt as necessary.  The world around you is not a static place.  What seems like a good idea today, may be a horrible choice in 2 years.  By having those multiple streams of income – many egg baskets – you reduce your risk of someone turning all of your eggs into omelets!

Want further insights?  Check out some excerpts of an interview we conducted with a Boomer small business owner.


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One Response to Getting Your Money To Work For You

  1. tdale September 3, 2014 at 7:48 am #

    Amen to that. I’ve recently started selling items on ebay. It’s a lot more work than I thought, with all of the shipping and packing and getting the right label on the right package. I made mistakes, and I’ve learned from them.

    I count my time at $15 per hour. Counting everything, I’m still “losing” money, but it’s actually getting close. A couple more changes in cleaning up my shipping process, and I think I’ll be there.