Rick Emerson, author of "Zombie Economics,” likes to help us spend money wisely... but for some things, it’s better to *not* spend at all. Rick stopped by to explain.
Five Places NOT to Put Your Money
1) Buying Future Collectibles
Here's a sentence that every Gen-Xer can finish for me: "So, my mother took my Star Wars toys, and..."
That sentence never ends with “kept them secured in an airtight, climate-controlled vault, eventually selling them for nine billion dollars at Christie's." No, it’s always "sold them for nine bucks at a garage sale...along with my lawn darts."
I blame Star Wars for many, many things, and this is one of them: the constant search for retirement collectibles. Every decade sees a frenzy to gather up a whole lot of something and stash them away, hoping to unload them for a mint somewhere down the line.
Except it never works, because the things you stash away don't become valuable. It's the things you forget about that become rare and valuable. Things that become unexpectedly valuable are, by definition, hard to predict...which means that your giant collection of Justin Bieber scarves will function mainly as kindling when you're living in the back of a dump-truck because you sold everything to buy…Justin Bieber scarves.
2) Putting All Your Money into Gold
Gold is something you hear about when the economy goes haywire: there's always some guy (flanked by a giant oil painting of Ben Franklin holding an eagle) telling you to put all your money into gold.
To be sure, gold does have monetary value, and the price does tend to slowly go up over time. The problem is that gold doesn't do anything: it just sits there looking sparkly and taking up space…like some sort of metallic Beanie Baby. Other than jewelry, it doesn't have much actual use…which means that it's unlikely to grow the way an investment should. That doesn't make gold a bad place to put your money, but it does mean your money won't be very active. A solid investment in a company that actually does something can often be much more beneficial.
And this isn't just my opinion: Warren Buffet says the same thing. As he put it, "All the gold that's ever been mined would form a cube around 65 feet high. For the same money, you could either buy that cube of gold or TEN Exxon-Mobils. Which would you rather have?"
3) Putting Everything into Bitcoin
Here's a rule of thumb: if your grandmother suddenly calls you and starts talking like a character on Silicon Valley, take a step back. Not from her...but from the hype around whatever it is she's discussing.
Here's another rule of thumb: if the biggest selling point of some investment is that “the government doesn't regulate it”, take another step back...because as we all know, there's nothing the government doesn't regulate. There are only things they haven't gotten to yet.
Bitcoin (an electronic currency that's somewhat –though not entirely– anonymous), is a fascinating and exciting technology...but "exciting" and “stable investment" don't usually go together. Ask yourself this: would you put all your money into Bosnian currency? No? What if I told you there were gigantic swings in the market, and their government was making noise about a gigantic crackdown? Sounds less than appetizing, right? That's Bitcoin at the moment.
I'm not even saying it's bad to invest in Bitcoin, but the third rule of thumb is this: don't put your money into anything you can't easily explain to other people. Investigate, then decide.
4) Falling for Pyramid Schemes
Here’s a phrase that never ends well: "Would you like to earn more money in just a few hours a week? While working from home?”
Back in the eighties and nineties, anyone hearing that phrase knew to run, and run fast. Otherwise, you ended up in some guy's living room while he drew circles on a whiteboard and talked about "your initial investment" and "your downline”.
And there was something else he always said: "This is not a pyramid scheme.” Whenever someone needs to actively point out that their "opportunity" isn't a pyramid scheme….it's probably a pyramid scheme.
In recent years, this has moved to the internet (especially Facebook), where a whole generation of people are alienating their friends by constantly babbling about cosmetics that no one wants to buy. This is where these business plans always lead: to everyone you know blocking your account and whispering about your terrible eyeliner.
Things to remember: if you have to pay up front for the privilege of selling something, or if a huge part of the process involves badgering your friends and family...you will almost certainly end up poorer (in every sense) for taking part.
5) “Investing” in Kickstarter
I should say this up front: one of the best things I own is called a Kitchen Safe, which is like a plastic cookie jar with a time-lock. I put cookies (or my phone, or whatever else) inside, and set the timer, and I can't get inside for ten minutes, or a day, or whatever I set it for. The Kitchen Safe came out of a Kickstarter campaign. Someone had the idea, asked for money, made the product, and now you can buy them everywhere. The reason that product sticks in my mind is because it's the exception. Most Kickstarter campaigns don't ever get that far, and some –a lot– never get anywhere.
People have started to get a sense of this, but still, every single week, I hear about some giant Kickstarter thing closing down and the money vanishing.
Even now, Kickstarter doesn't go out of their way to make this clear, so I will: it's you handing money to someone who has an idea for a product they may or may not ever actually create. If they do, great – maybe you'll get one, or two, or whatever they promised you. If they don’t follow through, you don't get one. Either way, they keep the money. If they run to Bolivia, they keep the money. If they blow it all on Justin Bieber clothing, they keep the money.
The best way to think of Kickstarter is as a donation site. Not an investment, and definitely not a store. When you give someone money for a great idea, write that money off as gone forever, with no return. I absolutely believe in the power of ideas, and the romantic image of the lone inventor…so when I give to Kickstarter, it's to support someone's vision, not to ever get anything back.