Welcome to the first installment of what I hope will be a long series of articles containing my incompetent advice, on many issues. Today the topic is money.
I won't cover the (much more important) issue of actually obtaining money in very much detail. Suffice it to say that there are many different ways to get it, and to spell them out would just be ... trivial. To list just a few examples: donation of haploid cells (if you happen to be a genetically fortunate male), having rich older relatives, and marrying "up". Or you could stick with the traditional "get a job" route, but that wouldn't be nearly as easy or fun as the aggregated average of my three examples.
Now that you have lots of money, what should you spend it on? If, like the majority of Americans your happiness is a linear correlation with your rate of spending, you should spend it all at once, and also max out your credit cards. If, however, you happiness production curve is more reasonable, there's an optimal amount of money you should spend in a typical week on frivolous things like ice cream, new clothes, or that kidney transplant you've been putting off.
As you can see, the more money you spend on nice things for yourself, the happier you get. But consider this example: You could spend $1000 on a small, shoddy-looking, used motorcycle and have some fun riding around and running errands, or you could spend $10,000 on a shiny new motorcycle and have a bit more fun impressing your friends and bothering the neighbors with your engine noise. On the other hand, you could spend $2 on bus fare, have to get up early every day, and miss the bus sometimes. Your choice depends on how much you would enjoy each thing, and also on how much money you had in the bank. Except for explaining what's going on, I can't offer any extra help on what to spend your money on. As my most loyal readers will note, I spend most of my money on bacon.
No, the topic that interests me today is what to do with money you're saving. Where should you keep it? The first option is in the bank. For many people, keeping the majority of your money in the bank is the smart thing to do. The bank will never lose your money (or if they do, Uncle Sam will cover it). You'll never* lose money at the bank. (* some restrictions and fees apply to low balances, too many transactions, using other banks' ATMs, or trying to access your money). Banks will even give you a small amount of interest, as a reward! Note, however, that this interest rate is generally not much better than the rate of inflation, and often (like right now) much lower. What this means is that yes, you won't lose money if you keep it in the bank, but you will lose value. You'll be able to buy fewer motorcycles with that money when you withdraw it in 5 years than you could have today. The moral here is that banks don't really keep your money "safe".
The next option is to keep all your money at home. You could either keep it as cash, which would be like a bank only without the fees, interest, and inconvenience. Or you could keep it as a commodity, like gold. Gold (in theory) is not subject to inflation. No more gold is ever created (yes, I know more gold is mined, but ignore that for a second). You can buy the same number of motorcycles in five years with the same lump of gold (or, like me, a small fraction of a motorcycle). However, you keeping stuff in your house isn't safe against robbery, and gold is inconvenient to change into cash.
The third option is to invest your money. The word "invest" branches into a lot of other things, but the underlying principles are the same for each type: you essentially gamble your money, hoping the value of your investments will rise. With higher risk comes higher reward: you know for sure that in the bank, your money will be worth almost as much as it is now, when you withdraw it in five years. With an investment, you run the risk of losing value, but that earns you the possibility of gaining value. Now different investments are in different places on the "risk - reward" spectrum.
As you can see from this image I pulled straight from wikipedia, with higher risk comes higher reward. The light blue line represents possible investment choices, and the dark blue line, which is unique to each individual, represents a line of constant "utility", which pretty much means "happiness". Some people are young and OK with more risks, so their dark blue line shifts up-right. Others might be planning to buy a house soon, and have the right amount of money, so they don't want to lose that money. Their dark blue line shifts down-left. Yet other people might want to help save humanity by investing in green energy or something, which would change their "happiness" curve in various ways.
Diversification: Buying stocks can give you a good return, but there is a way to lower the amount of risk without compromising the amount of return: Diversification (that's right, Diversification). Let's say you buy $100 worth of google. Google's stock will roughly follow that of all stocks in its main area, like microsoft and apple. But sometimes when google does poorly, apple does well. If you buy a collection of several stocks from that sector, like microsoft, apple, and google, then the value won't jump around as much, but it will still rise when the sector rises. But you can take this one step further and say "when tech stocks fall, sunblock stocks will rise!" (because all those WoWers and googlers have pale, pale skin) and also buy some shares in the sun-block sector. Taking it even further, you might note that when stocks do poorly, bonds do well, so you could buy some of those.
In fact, a while ago some people had the great idea to put all their money together and hire someone to decide what to invest it all in (so they didn't have to quit their jobs and watch the stock market all day). That's called a mutual fund. Various other types of investments exist, filling niches of the risk-reward spectrum and offering different amounts of diversification.
