In all seriousness (as this thread seems to have inspired some silly responses as well, though I love @booinyoureyes' picture) investing in one way or another is one of the best choices you can possibly make. The reality is that we live in societies that have almost universally adopted finance as the means to fuel their economies. Is that good? No, but it doesn't make it entirely bad either.
One of my few regrets is that I didn't manage my money better when I was younger. Now that I'm nearly halfway through my 30s, I have a fairly large amount in high-risk investments (primarily based in Asia), several very low-risk accounts and very little debt. I've paid off my first two degrees, and am in the process of paying for the third. My wife and I own several small pieces of land, one of which is rented out. In other words, I'm doing well relatively speaking.
However, I didn't really start seriously thinking about any of this until about three years ago. Had I done so about a decade earlier, I would have had nearly half a million dollars by now. Puts things into perspective...
As for the world economy, I don't foresee a collapse at any point in the near future. We're certainly seeing what I would classify as growing pains (remember that globalization is still rather young), but in some ways that's positive, as it's forcing us to examine and potentially regulate our monetary systems more effectively. Again, the reality is that there will always be individuals who seek to take advantage of systems; I don't think we can blame capitalism or any other system for our own human failings.
My recommendation--like @OcculusX, offered as a layman--is to either do enough research to feel comfortable investing on a small basis and make a habit of often going counter to the market (buy when others are selling and vice versa), or to invest through a reputable firm, which is what I have opted to do. If you're young, definitely invest in at least some high-risk areas, as your portfolio can be balanced out over longer periods of time, reducing the long-term risk.
I think you are making bonds sound a lot more complicated than they really are.
Essentially a bond is the government borrowing money. It borrows the money for a certain amount of time and pays interest on the borrowing - same kind of thing as if you borrow money from the bank (e.g. a mortgage).
For example the government might borrow $100m from Investor A for 10 years at an interest rate (also called the coupon rate) of 2%. So each year the government will pay $2m of interest, and will pay back the $100m at the end of the 10 years.
Trading bonds
The only complication arises because bonds also get traded, and probaby not for the same price as the original government borrowing.
Continuing the example above, lets imagine that two years later, interest rates generally have increased and the 2% interest rate on the bond isn't very attractive to Investor A. He wants to get his money back from the bond and invest it in something else. He can't get the money back from the government because they aren't due to to repay the bond for another 8 years, so instead he sells the bond to Investor B.
However, because the bond is now less attractive (due to general interest rate rises) Investor A can't sell the bond for the full $100m. Instead Investor A may sell it to Investor B for, say, $90m. This makes the bond much more attractice to Investor B who will still get the $2m interest/year for the next 8 years and will then get $100m from the government at the end of the 8th year.
General features of bonds
Generally bonds are seen as low risk, low return forms of investment. For example US government bonds - the risk of the US government defaulting (i.e. refusing to pay) are very low, but equally returns on these bonds are also very low at the moment.
However it does very much depend on which government is issuing the bonds. Greek government bonds for example would be much much higher risk!
I just hope that disasters like what occurred in 2008 don't start to occur at ever higher frequencies. (It's a theoretical scenario) That would be horrible.
Credit default swaps, one of the factors which contributed to the collapse in 2008, were invented in the late 90s. At the time, the SEC decided that those investment products were so new and innovative that they couldn't determine whether they should be regulated a little, regulated a lot, or banned, thus they opted for the laziest solution of all--they did nothing. If banks were forced to keep all mortgages on their books when they lend to home buyers rather than wrapping them up, slicing them into blocks, and selling the blocks then much of the collapse would not have happened the way it did.
Another major contributing factor is the Fed keeping interest rates artificially low, especially the interbank rates; this helps only the large financial institutions, not the individual consumer. Yes, this does force some people to put their money into riskier investments which makes more money for the institutions via fees but is the potential for greater reward worth the risk of a repeat of 2008? Note: I did not suffer unduly through the housing collapse because of where I live and my career field...but a lot of people I know did suffer.
I am never a fan of too much government regulation; however, banks and financial institutions need to be regulated. By their very nature, they seek out any opportunity to make more money, even if that opportunity hurts other people in the long run. Financial institutions are not there for you, they are there for themselves. I am not saying they are bad or evil, of course--my investment portfolio, being well-diversified, had a growth rate of nearly 30% for 2013 and I do appreciate that--but it is truthful to state that they are self-centered.
I just hope that disasters like what occurred in 2008 don't start to occur at ever higher frequencies. (It's a theoretical scenario) That would be horrible.
I think, that financial bubbles like with what happened in 2008 will always happen, they're part of the economy, and have been since the 1600's(tulips!) I just hope that nothing like that will happen for a while, or on that scale.
For example the government might borrow $100m from Investor A for 10 years at an interest rate (also called the coupon rate) of 2%. So each year the government will pay $2m of interest, and will pay back the $100m at the end of the 10 years.
Does a bond use the same amortization formula that a loan from the bank would? The complexity comes from not knowing how much money you get back from the Bonds over the period of their lives. What happens when the interest rate in the economy changes? (It doesn't change if the bond has a fixed coupon... I don't think) What happens when the inflation rate changes?
Say there is a loan from a bank at 6% for $5000 that is amortized over 5 years at $96.66/month. At maturity, this loan will give you $5799.60. That is equivalent to a 16% return on the investment at maturity.
The equivalent bond is $5000 face value, 5 years to mature at 16 coupon! Which would be equivalent to... $5000*1.16/(5*12) = $96.67. So... they are two sides of the same thing; is that right?
It's interesting that when you are taking out a loan, you are given the amortized percentage rate... but when you are on the receiving end of a bond you are shown the simpler 16% return.
Even more interesting... say you were to get a house for $120,000, a 30 year mortgage could be taken out for 4.5% at $608.20/month. This would be equivalent to a face value of $120,000 with 82.5 coupon! Well, now, would you look at that.
I think you are making bonds sound a lot more complicated than they really are.
Essentially a bond is the government borrowing money. It borrows the money for a certain amount of time and pays interest on the borrowing - same kind of thing as if you borrow money from the bank (e.g. a mortgage).
Most of what you said I agree with, but not all bonds are government-issued.
Another major contributing factor is the Fed keeping interest rates artificially low, especially the interbank rates; this helps only the large financial institutions, not the individual consumer. Yes, this does force some people to put their money into riskier investments which makes more money for the institutions via fees but is the potential for greater reward worth the risk of a repeat of 2008?
Very true, and short term interest rates were essentially zero following 2007. The policy pretty much encouraged malinvestment for the longest time, then made it impossible for the necessary (if a little painful) corrections to take place. This policy doesn't look likely to change with the incoming chaiwoman.
Problem with this sort of banking system is that political institutions are bound to favor short-sighted solutions (politicians need to get re-elected). The Fed has a very awkward degree of independence: the general policy is subject to political pressures, but the details of its day to day activity has no government oversight whatsoever. Basically where it should be independent it does not act alone and where it should be checked there is no watchdog there to ensure that its powers are not being abused.
based on what @Isandir said, that is why im working so hard in my 20s, because when I hit mid to late 30s, I want to be wealthy enough that I don't have to work if I don't have to, because being rich is better than being poor ( or at least in north America ) I've read 2 amazing books when it comes to money management and how to get wealthy, and they have changed my world forever when it comes to money: Rich dad poor dad, by Robert kiyosaki and automatic millionaire by david bach, those 2 books are AMAZING, and are easy reads easy to follow, and I would suggest them to anyone who even has a spark of interest in becoming wealthier
Warren Buffet often mentions that his inspiration for how he came to handle his finances was a book written by a fellow named Benjamin Graham entitled, "The Intelligent Investor".
based on what @Isandir said, that is why im working so hard in my 20s, because when I hit mid to late 30s, I want to be wealthy enough that I don't have to work if I don't have to, because being rich is better than being poor ( or at least in north America )
Run your life on a cash basis whenever and wherever possible. Do not use credit unless you have absolutely no choice. If you have credit cards then put them in an envelope, stick the envelope on a shelf, and when they are paid off let the accounts stay open a year before you close them and cut up the cards. Make a personal budget and stick to it, taking care to have money set back to save and money set aside to spend frivolously (but not too much). Cut out or trim any expense you really do not *need*--buy your coffee at 7-11 rather than Starbucks (ideally, you'll make it at home and take a large thermos with you). Once you have saved $1,000 either put that money in a fireproof safe somewhere secure in your house, put it in a bank account that doesn't have a card linked to it (forcing you to go to the bank to have to access that money), or at the very least put in an account separate from all other accounts and label it "emergency fund". Very important--do *not* use the emergency fund unless you face an actual emergency. Purchase the least expensive car you can afford with cash; as long as it runs and is reasonably safe that is all that matters. Extremely important--once that car is paid off keep it and don't worry about getting another vehicle until your current one falls apart. When facing any purchase, if you cannot afford to buy it for cash right now then don't buy it until you can pay cash. That is, in essence, the Dave Ramsey system. His motto is "live like no one else today so that you may live like no one else tomorrow". What that means is that if you are willing to cut any and all unnecessary expenses and live on a cash basis now then in the future running on a cash basis won't be a problem because you will have the cash.
Studies have shown that most people who are millionaires became that way because they managed their money and usually started their own business; once the business becomes established then other people's labor becomes money in the millionaire's pocket. Some people were lucky and got into the right business at the right time; examples include Mr. Gates and Mr. Zuckerberg. Most people who are truly extremely wealthy have that advantage because of generational wealth--their ancestors built a fortune and then their descendents built on top of that. If you aren't in the latter group now then you probably never will be. I know that I am not. Heck, I'm not even in the first group of regular millionaires.
@Mathsorcerer I have no credit card debt, I paid off my car 2 years ago and I save about 1500 - 2000 a month , part of the strategy is working 70+ hours a week, because I don't have time to spend money on useless garbage and since im working over 70 hours a week, money has to be coming in just from the fact that I work so much, now at the moment, money is being saved for when I go to BCIT in march, and after the 23 week coarse im taking I already have a job lined up for it when im done and I can start making 10 000 bucks a month ( which I think is a decent starting wage) and with all that extra money I save, I will be spending it on investment real estate, because that is the investment I am most comfortable with, and understand the most, because I value my money and if im going to put it in " harms way" with investing I want to understand what im investing in, not just give someone a handful of money and hope for the best sort of speak
@Mathsorcerer I have no credit card debt, I paid off my car 2 years ago and I save about 1500 - 2000 a month , part of the strategy is working 70+ hours a week, because I don't have time to spend money on useless garbage and since im working over 70 hours a week, money has to be coming in just from the fact that I work so much, now at the moment, money is being saved for when I go to BCIT in march, and after the 23 week coarse im taking I already have a job lined up for it when im done and I can start making 10 000 bucks a month ( which I think is a decent starting wage) and with all that extra money I save, I will be spending it on investment real estate, because that is the investment I am most comfortable with, and understand the most, because I value my money and if im going to put it in " harms way" with investing I want to understand what im investing in, not just give someone a handful of money and hope for the best sort of speak
What job makes 10,000 bucks a month as a starting wage?
boiler maker, that's what I am going for, and the guy that is hiring me and my brother is going to pay us above starting wage when we start, the money that can be made being a boiler maker is ridiculous
that first link sounds pretty accurate as to what a boiler maker is ( I only vaguely know what they do) and that second link wouldn't load, plus it is for the USA not Canada, so I have no idea what that page says, the information that I received about being a boiler maker was from somebody that already does it, and by the sounds of it, it sounds pretty badass
I experience getting different kind of loan in fact that last one is from the https://reissuvippi.fi/ but i did note experience too on getting loan in life insurance it is quite weird for me.
Comments
One of my few regrets is that I didn't manage my money better when I was younger. Now that I'm nearly halfway through my 30s, I have a fairly large amount in high-risk investments (primarily based in Asia), several very low-risk accounts and very little debt. I've paid off my first two degrees, and am in the process of paying for the third. My wife and I own several small pieces of land, one of which is rented out. In other words, I'm doing well relatively speaking.
However, I didn't really start seriously thinking about any of this until about three years ago. Had I done so about a decade earlier, I would have had nearly half a million dollars by now. Puts things into perspective...
As for the world economy, I don't foresee a collapse at any point in the near future. We're certainly seeing what I would classify as growing pains (remember that globalization is still rather young), but in some ways that's positive, as it's forcing us to examine and potentially regulate our monetary systems more effectively. Again, the reality is that there will always be individuals who seek to take advantage of systems; I don't think we can blame capitalism or any other system for our own human failings.
My recommendation--like @OcculusX, offered as a layman--is to either do enough research to feel comfortable investing on a small basis and make a habit of often going counter to the market (buy when others are selling and vice versa), or to invest through a reputable firm, which is what I have opted to do. If you're young, definitely invest in at least some high-risk areas, as your portfolio can be balanced out over longer periods of time, reducing the long-term risk.
Essentially a bond is the government borrowing money. It borrows the money for a certain amount of time and pays interest on the borrowing - same kind of thing as if you borrow money from the bank (e.g. a mortgage).
For example the government might borrow $100m from Investor A for 10 years at an interest rate (also called the coupon rate) of 2%. So each year the government will pay $2m of interest, and will pay back the $100m at the end of the 10 years.
Trading bonds
The only complication arises because bonds also get traded, and probaby not for the same price as the original government borrowing.
Continuing the example above, lets imagine that two years later, interest rates generally have increased and the 2% interest rate on the bond isn't very attractive to Investor A. He wants to get his money back from the bond and invest it in something else. He can't get the money back from the government because they aren't due to to repay the bond for another 8 years, so instead he sells the bond to Investor B.
However, because the bond is now less attractive (due to general interest rate rises) Investor A can't sell the bond for the full $100m. Instead Investor A may sell it to Investor B for, say, $90m. This makes the bond much more attractice to Investor B who will still get the $2m interest/year for the next 8 years and will then get $100m from the government at the end of the 8th year.
General features of bonds
Generally bonds are seen as low risk, low return forms of investment. For example US government bonds - the risk of the US government defaulting (i.e. refusing to pay) are very low, but equally returns on these bonds are also very low at the moment.
However it does very much depend on which government is issuing the bonds. Greek government bonds for example would be much much higher risk!
Another major contributing factor is the Fed keeping interest rates artificially low, especially the interbank rates; this helps only the large financial institutions, not the individual consumer. Yes, this does force some people to put their money into riskier investments which makes more money for the institutions via fees but is the potential for greater reward worth the risk of a repeat of 2008? Note: I did not suffer unduly through the housing collapse because of where I live and my career field...but a lot of people I know did suffer.
I am never a fan of too much government regulation; however, banks and financial institutions need to be regulated. By their very nature, they seek out any opportunity to make more money, even if that opportunity hurts other people in the long run. Financial institutions are not there for you, they are there for themselves. I am not saying they are bad or evil, of course--my investment portfolio, being well-diversified, had a growth rate of nearly 30% for 2013 and I do appreciate that--but it is truthful to state that they are self-centered.
Say there is a loan from a bank at 6% for $5000 that is amortized over 5 years at $96.66/month. At maturity, this loan will give you $5799.60. That is equivalent to a 16% return on the investment at maturity.
The equivalent bond is $5000 face value, 5 years to mature at 16 coupon! Which would be equivalent to... $5000*1.16/(5*12) = $96.67. So... they are two sides of the same thing; is that right?
It's interesting that when you are taking out a loan, you are given the amortized percentage rate... but when you are on the receiving end of a bond you are shown the simpler 16% return.
Even more interesting... say you were to get a house for $120,000, a 30 year mortgage could be taken out for 4.5% at $608.20/month. This would be equivalent to a face value of $120,000 with 82.5 coupon! Well, now, would you look at that.
Problem with this sort of banking system is that political institutions are bound to favor short-sighted solutions (politicians need to get re-elected). The Fed has a very awkward degree of independence: the general policy is subject to political pressures, but the details of its day to day activity has no government oversight whatsoever. Basically where it should be independent it does not act alone and where it should be checked there is no watchdog there to ensure that its powers are not being abused.
That is, in essence, the Dave Ramsey system. His motto is "live like no one else today so that you may live like no one else tomorrow". What that means is that if you are willing to cut any and all unnecessary expenses and live on a cash basis now then in the future running on a cash basis won't be a problem because you will have the cash.
Studies have shown that most people who are millionaires became that way because they managed their money and usually started their own business; once the business becomes established then other people's labor becomes money in the millionaire's pocket. Some people were lucky and got into the right business at the right time; examples include Mr. Gates and Mr. Zuckerberg. Most people who are truly extremely wealthy have that advantage because of generational wealth--their ancestors built a fortune and then their descendents built on top of that. If you aren't in the latter group now then you probably never will be. I know that I am not. Heck, I'm not even in the first group of regular millionaires.
Cuz if you are, we are coming for your maple syrup!
http://en.wikipedia.org/wiki/Boilermaker
http://www.payscale.com/research/US/Job=Boilermaker/Hourly_Rate