Cash Comes in Three Flavors
Believe it or not, there are different types of income. Just as there's different types of stocks, bonds, and mutual funds, so too there are different types of income - three to be exact.
First is Fluctuating Income - which is effectively the "rent" you receive for letting someone else use your money. And this type of income goes up and down right along with the ups and downs of the economy. If interest rates rise then your income rises. If interest rates fall then your income falls. Because of this flexibility you, the owner, can move and withdraw your money with relative ease. The drawback is, just like a renter at a week-by-week flop house, you get bounced around quite a bit. Common examples here are Money Market Funds, Short-Term CD's, and Treasury Bills.
The next flavor is Fixed (or sometimes called Flat). Here you lock in a given rate for a given period. Three, five, ten, or even thirty years. With this type of income, what you are literally doing is signing a long-term "lease" for the use of your money. The benefit to you is obvious. You get a higher rate than the previous flavor, and you know what and when - and for how long you're going to get it. Common examples here are long-term CD's, Corporate, Municipal & Government Bonds.
The third flavor is Rising. Here you get cost of living raises on your money. Every year or so you get a raise. Not because you're such a superstar but because you're still breathing! Common examples here are Utilities, high-dividend-paying Blue-Chip Stocks, income oriented real estate and REIT's.
Now this is important. Make doubly sure you get it: The first two flavors (Fluctuating and Fixed) will not and cannot maintain your standard of living or keep your purchasing power stable. Only the third flavor can do that.
And another important point: In order to keep pace with inflation, the highest yield is not the answer. Rather, the answer is: What is the yield's growth rate? If the yield actually grows, then you have a Riser. If not, then good luck, because you'll need it!
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First is Fluctuating Income - which is effectively the "rent" you receive for letting someone else use your money. And this type of income goes up and down right along with the ups and downs of the economy. If interest rates rise then your income rises. If interest rates fall then your income falls. Because of this flexibility you, the owner, can move and withdraw your money with relative ease. The drawback is, just like a renter at a week-by-week flop house, you get bounced around quite a bit. Common examples here are Money Market Funds, Short-Term CD's, and Treasury Bills.
The next flavor is Fixed (or sometimes called Flat). Here you lock in a given rate for a given period. Three, five, ten, or even thirty years. With this type of income, what you are literally doing is signing a long-term "lease" for the use of your money. The benefit to you is obvious. You get a higher rate than the previous flavor, and you know what and when - and for how long you're going to get it. Common examples here are long-term CD's, Corporate, Municipal & Government Bonds.
The third flavor is Rising. Here you get cost of living raises on your money. Every year or so you get a raise. Not because you're such a superstar but because you're still breathing! Common examples here are Utilities, high-dividend-paying Blue-Chip Stocks, income oriented real estate and REIT's.
Now this is important. Make doubly sure you get it: The first two flavors (Fluctuating and Fixed) will not and cannot maintain your standard of living or keep your purchasing power stable. Only the third flavor can do that.
And another important point: In order to keep pace with inflation, the highest yield is not the answer. Rather, the answer is: What is the yield's growth rate? If the yield actually grows, then you have a Riser. If not, then good luck, because you'll need it!
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posted by Bob Moser at
9:16 PM
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