Why would anyone put their hard-earned money into stocks? You could be more conservative with your decision and put the funds in your checking account or preferably a savings account at the bank. FDIC deposit insurance protects you up to $250,000 per depositor (account holder), per insured bank.
In the stock market, there really aren’t any guarantees, certainly nothing that will protect you up to $250,000 like FDIC insured banks. In order to achieve greater returns, one must take on greater risk. Investing in stocks can be a riskier proposition because the value of the stocks goes up and down. The negative outcome and risk to letting your money sit in a checking or savings account collecting dust is that it can be eaten away from inflation and not produce enough monthly interest for expenses. On top of this, the banks love to take your idle cash that is dangling around and loan it out to make money on the interest rate spread they charge others for loans.
I like to take Warren Buffett’s philosophy and view investing in stocks as a long-term approach. When you buy stock, you’re actually buying shares issued by a corporation. You would be what is considered “bullish” or “long” the company in Wall Street jargon. Of course, a lot more goes into buying stocks; What are the products or services they sell? Who are the competitors? What part of their business accounts for the greatest revenue stream? How have their quarterly earnings been? These are all valid questions. It’s important and prudent to have a fundamental understanding of why you are choosing certain investments over others.
My opinion is that one ultimately buys stock to make money on their money. If this wasn’t the case, you would just leave it in the bank and accept the safety over any returns the market is willing to give.
When you come up with a financial budget you may need to drawdown on your investment account. Below would be a financial budget example of using your account as an income stream.
Example: You have a monthly budget need that is short $2,000/month. The positive news is your investment account has $500,000. How should you best use the assets to meet the goal? Putting together a portfolio of stocks or stock mutual funds to return 5% you could expect to receive $25,000/year or $2,083/month. This scenario would put you in a comfortable position to meet your income needs. (The investment amounts are less relevant, you can interchange them to your financial situation. It’s more of understanding how to apply the rates of return to an income stream.)
A quick Google search leads me to Bankrate.com for the best high-interest savings rates and they range from 1.50% to 1.65%. Using our $500,000 example above, the 1.5% would pay you $7,500/yearly or only $625/monthly, falling short of your monthly budget needs.
Stocks provide the opportunity to use money in a positive light. When having a proper financial budget and income stream this can relieve the pressure, worry, and stress. Understanding your risk appetite and goals of your money should always be the first piece to any fruitful ending. With every potential risk there can be reward but not guaranteed.
All my best,
Justin