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By NewsOne Financial Blogger Ryan Mack:

If I gave you $100,000 today how would you spend it?

Before you continue to read, I want you to take a moment and think hard about this question.  How would you put that money to work?  After you have thought about it, which of the following two scenarios describes the best use of the funds?

Scenario A: Spend $50,000 on a “caddy”, $25,000 for your pinky, and the balance on a “pound of blow”.  In twenty years you will have an old pinky ring and a lot less brain cells.

Scenario B: Spend $20,000 on a Honda Accord, $5,000 on a nice vacation, and invest $75,000 in your own portfolio.  In twenty years you could have as much as $350,000 (with a very modest 8% return).

For those who chose Scenario A, you have agreed with famous rap star Lil’ Wayne as this scenario was taken from his lyrics in his song “Stuntin’ Like My Daddy”.  I listen to rap music, but we must understand that many of the lyrics in this music were written because of their ability to make money…NOT because of their contribution to our intellectual capital as a people.

I personally agree with Scenario B and so do the majority of millionaires in this country.  Half of the millionaires in America have never spent over $30,000 for a car in their ENTIRE life (The Millionaire Next Door, Thomas J. Stanley and William D. Danko).

One reason is they are so busy making money that they do not have much time to worry about self image.  If you were TRULY wealthy, and like 5% of America who controls 95% of the wealth in America, would you care about what others thought about you?  Another more important reason is they understand that as long as they are spending money on items that lose value instead of things that gain value they are less able to maintain and increase their economic status.  This is why you will hear stories about Jim Walton, heir to the fortune created by his father Sam Walton (founder of Wal-Mart).  He still drives a 15-year-old Dodge Dakota pickup despite being number 23 on the 2007 billionaire’s list.  You may have also heard about Ingvar Kamprad, founder of multi-billion dollar enterprise and also a billionaire.  He still drives a Volvo which is also 15 years old.  Before he attained his fortune, his father gave him a very modest reward for doing well in school and what did he spend his money on…a “modest” furniture company named Ikea which reported revenues of $17.7 billion dollars in 2005.

The question that you should be asking if you do not know and have not asked already is, “What are they spending their money on if it is not consumption?”  The opposite of consumption (putting your money into assets that lose value) is production (putting your money into assets that go up in value). Four of the most common vehicles that you can invest your money into are the following:

1.      Stocks

2.      Bonds

3.      Real Estate

4.      Entrepreneurship

1.     Stocks

a. The outstanding capital of a company or corporation.
b. The shares of a particular company or corporation.
c. The certificate of ownership of such stock: stock certificate.[1]

Simply put, stock is ownership of a company.  You can go to Starbucks and purchase coffee to be a customer.  However, you can purchase stock in Starbucks and become part owner of the company.  As an owner, you have a stake in every coffee that is purchased.  The more shares you purchase, the larger your stake becomes.

2.     Bonds

a. A certificate of ownership of a specified portion of debt due to be paid by a government of corporation to an individual holder and usually bearing a fixed rate of interest.[2]

Both governments and corporations need to raise capital to operate.  Salaries, suppliers, facilities are all examples of expenses that an employer incurs on a consistent basis.  Welfare, social security, Medicaid, public schools, and the Iraq war are all examples of programs and events that require a significant amount of funding from the government.  One of the ways to pay for expenses and programming is to borrow from individuals by issuing bonds.  If you purchase a bond you are essentially lending that entity money with their promise to return the funds borrowed PLUS interest.

3.    Real Estate

a. Land plus anything permanently fixed to it, including buildings, sheds, and other items attached to the structure.[3]

Whether it is your first home or purchasing a piece of investment property on the side, home ownership has always been an American dream and one of premier ways of accumulating wealth.

4.   Entrepreneurship

a. The organization, management, and assumption of risks of a business or enterprise, usually implying an element of change and a new opportunity.[4]

Owning and operating your own business has proven to provide the highest return of all of the stated investment vehicles.  However, this investment also has the highest risk.  It is a risk that is worth it because you are investing in your own ideas.  There are those who want to invest in other peoples’ ideas…these investors are called venture capitalists.

Up Next: Steps to take before investing…

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