When we invest, we obviously have to have money to invest with. When we consider money in our checking account, we usually call that cash. Money in storage that isn’t earning any significant amount of interest can be called a cash equivalent. As you may have already assumed, we don’t need the stock market to hold cash. The problem with cash, as we discussed above, is that money keeps losing value, so we need to do something with it to protect your purchasing power.
In the world of investing, you are usually rewarded because you take risks. When there is no reasonable risk associated with an “investment,” the interest you make is at a meager percentage called the risk free rate. For our purposes, we can also consider this to be the cash rate. In some rare economic environments, interest rates can be so high that the cash rate is a good enough investment that we don’t want to look at alternatives because of the risk of losing money.
If you can make 15% interest at your local bank (where the FDIC guarantees your investment), then put this book away and open a savings account immediately. This hasn’t been the case since the Carter Administration, so you need to learn some alternative investment ideas. As of this writing, you will lose money if you invest in bank savings accounts and the like.
Last Modified: 07/11/2018
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