Five Investment Options To Avoid

from daveramsey.com on 21 Jul 2010
 

By Dave Ramsey

Everybody’s got an opinion on where to invest your money. But let’s be honest: Some people just have stupid ideas—even though they may have the best intentions. You can still love your broke brother-in-law without taking his investment advice.

Here are five investment ideas you should avoid. If someone suggests using any of these options, run like the wind!

Savings Bonds

We all have relatives that give savings bonds as gifts. While we may appreciate the sentiment, the truth is that savings bonds have a lousy rate of return. After six months, cash them out and put the money in a good growth stock mutual fund that averages 12% interest. That way, when Grandma asks you how your savings bonds are doing, you can tell her that they are performing great!

Prepaid College Tuition

Don’t prepay college tuition. If you put $10,000 in prepaid college tuition programs, all you make on that $10,000 is what tuition costs when your kid goes to school. Tuition has been increasing at an average of 7% a year nationally. But Educational Savings Accounts (ESAs) have averaged more like 12% every year. I would suggest investing the $10,000 in a growth stock mutual fund ESA where your money grows tax free. Read more about saving for college.

Prepaid Burial Plans

The same concept is true for prepaid burial plans. If you’re 40 and invest money in a mutual fund rather than paying for funeral costs, you’ll have about $500,000 when you die at age 90. Who are you, King Tut? If you have gone through the gut-wrenching exercise of planning a loved one's funeral while you are grieving—selecting a casket, burial plot and so on—then you know you don’t want your loved ones to experience the same thing. Fill out the paperwork so that no one has to make decisions while they are emotional. Then when the death happens, everything is organized and you have the money to afford it. You don’t save by prepaying.

CD Savings Accounts

CDs have an extremely low rate of return, so they are bad investments. These “Certificates of Depression” typically receive a 2–3% rate of return. If inflation goes up at an average of 4% every year, then CDs will make you lose money. Keep some money available in a money market account for easy access, and then invest in mutual funds long-term.

Lottery

Yes, some people actually believe buying a lottery ticket is investing in their future. But the truth is that the lottery is a tax on poor people and on people who can’t add. People who have won with money don’t use the lottery. It’s a rip-off instituted by our government. The lottery offers false hope, not a ticket out. Hard work and diligence are how wealth is built, not dumb luck.

The bottom line here is that rich people don’t get rich off things like CD savings accounts. Instead, they make smart investment decisions over a long period of time. They put their money in the right places and take advice from people they can trust.

Contact an investment professional in your area that I recommend. This person will have the heart of a teacher and help you understand what you are investing your money in.

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