CDs, T-bills, US gov securities

One other investment that people generally gets introduced to early in their life is CDs, or certificates of deposits. This is the common investment vehicle of banks. However, like life insurance, their returns are really low, usually 2-5%. Because of this, the joke with CDs is "certificates of depreciation". Again, once you factor in inflation and taxable interest, the returns are often negative for a "safe" investment.

Most people would get really angry to learn how much money banks make on this money deposited in CDs. First, banks are eligible to loan up to 10 times the amount deposited. These loans are part of the fractional reserve system (look up definition and example on wikipedia.org). When the loans are granted, the bank makes money in interest as the loans are paid back. Those payments are again lent out again on new loans. The cycle continues. This is how banks make money essentially out of nothing, because they are not putting up any collateral for the loans. As long as the loans don't default and there is not a huge demand for withdrawals, the money flows endlessly. When there is a huge demand for withdrawals, this is called a "run" on the bank or a bank panic. If that continues, banks eventually have to close. We haven't seen this in the US for over 70 years. Remember the savings and loan scandals of the late 80s? But, due to the dollar losing value worldwide and the recent sub-prime loan debacle, bank failures are likely again.

So, people might like the "safety" of US government securities, such as treasury bills (t-bills mature in less than 1 year), treasury notes (t-notes are from 2-10 years), treasury bonds, (t-bonds are 10-30 years), Treasury Inflation-Protected Securities are the inflation-indexed bonds (TIPS are in 5,10, & 20 year maturities), or savings bonds. The longer the maturity, the higher the yield. All of these are sold at a discount and yield their full value upon maturity. However, the returns are again very low, usually 2-6% per year. With inflation and taxable interest, you would be lucky to get a positive gain.

Both types of these vehicles have their place. For the elderly who are on a fixed income from Social Security or pensions, they have to rely on steady income to live. They are not likely to look for the value of their assets to grow, but to preserve whatever wealth they have accumulated. This is when these vehicles are appropriate.

Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this:
that wisdom preserves the life of its possessor. Ecclesiastes 7:12

More investment vehicles are coming. Stay tuned ...