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Owning vs. Loaning – How Will You Invest In The Market?


There are two primary ways that a person can invest in the market – you can either own something, or you can loan someone money. Admittedly there are other exotic strategies, however these are the two most common, and ones that investors should probably stick to.

Owning

The first way to earn money in the market is to own something. You could own a company, gold, or real estate. When you want to own part of a company, you can simply purchase stock in that company. Purchasing stock means you literally own a part of that company.

So let’s break this down further. When you own something, you can earn money in 2 primary ways:

1. By what you own being profitable – When companies are profitable, they can distribute those profits to the owners of their company (also called shareholders) in the form of dividends. If you own rental real estate, you can receive whatever rent is left over after mortgage payments.

2. By the value of what you own going up – The value of a company can go up or down, and this is reflected in the price of the stock of the company. The price of gold or real estate can go up, and you can profit if you choose to sell it.

Now that you know about owning, what about loaning?

Loaning

You can earn money by loaning money to others. When you deposit money into a savings account at the local bank, they pay you interest (admittedly at lower rates than in the past). By making this deposit, you are literally loaning the bank money. Another example of this is when you purchase a CD. Since you are locking in the loan for a longer period of time, the bank is willing to pay you a higher interest rate.

You can loan money to the government by purchasing T-Bills or TIPS, or to cities through municipal bonds. You are loaning these entities money, and in return they pay you interest. You can also loan companies money by purchasing their bonds.

As you can see, purchasing stock is the most common example of the Owning category, while purchasing bonds is the most common example of the Loaning category. If you want to invest in a company, you can chose to own part of it by purchasing stock, or loan the company money by purchasing a bond. If you want to invest in real estate, you can either own the real estate, or you can loan someone else money in the form of a mortgage.

Have you ever thought about investing in the form of Owning vs. Loaning? Does this help to simplify how you can earn money in the market? Please feel free to share your thoughts!

I would like to credit my mentor Rick Kahler for introducing me to this simplified way of viewing investing

How To Convert a Non-Deductible IRA to a Roth IRA


Roth IRA 401kSo you want to contribute to a Roth IRA, but you make too much money, and your employer doesn’t offer a Roth 401(k) eh? If your Adjusted Gross Income (AGI) is higher than $110,000 (or $173,000 if married), you can’t contribute directly to a Roth IRA for 2012. But what if you REALLY want to contribute to a Roth IRA? There IS a way!

Non-deductible Traditional IRA contributions allow high income earners to get some of the tax benefits of IRA’s, but not all of them. Money put into a Traditional IRA is normally tax deductible, grows tax deferred, and is taxed when you take the money out in retirement. As the name suggests, non-deductible IRA contributions don’t give you a tax deduction, however the money grows tax deferred, and only the growth is taxable when you take it out in retirement.

Roth IRA’s are not tax deductible either, but the growth is never taxed! You can see why someone would much rather have money in a Roth IRA as opposed to having non-deductible IRA contributions… huge tax savings on the growth! This is why many people would want to convert their non-deductible IRA contributions to a Roth IRA. Read more..

Investments Worth Making With $50 or Less

Do you feel like you don’t have enough money to start investing? I have been reading The 4-Hour Workweek by Timothy Ferriss, which goes though his path to working less and spending more time enjoying life. One recommendation he makes is for you to list all of your expenses on a single sheet of paper. Go through your expenses line by line and ask yourself, “does this contribute to my happiness?” It is actually a really powerful exercise  because it forces you to reevaluate and get rid of unnecessary expenses. I recommend you give it a try, and see if you can create some wiggle room in your budget so you can start investing! Read more..