investing moneyInvesting has always been a bit of a tricky business. You need to balance a good mix of risk and reward with your money. There are examples of people and organizations who have tipped this balance too far in one direction or another. For example, A number municipalities and school systems in the state of Florida have actually wrote bounced checks to their employees. It wasn’t an accounting error on their part, rather they had been investing their cash on hand into an investment pool made of derivatives that were holding mortgages of many sub-prime lenders. They were taking on far too much risk with their short term cash reserves and took out too much risk. When the risk came back to bite them, it bit them hard, and many state agencies weren’t even able to meet their payroll! The lesson we can learn from this story is that a better interest rate on paper isn’t always the best investment.

We need to keep a good balance of risk and reward in our investments in order to ensure that we are earning a decent interest rate, but not take on too much risk. In order to determine how much risk you can take on with your investment, you first have to ask yourself what this money is for.

Is it for short term savings that you might need to use in the near future? Is it for emergencies only in case you lose your job or there’s a medical problem? Is this money for a savings goal that is under five years, say maybe a down-payment for a mortgage on a house? If this is the case, you want to avoid taking on any significant amount of risk. You don’t have the luxury of waiting for your investment to recover if it drops in value for the short term, so you want to be sure that the money’s there. You should put this money in a high-yield savings account at a place such as Emigrant Direct, ING Direct or HSBC Direct. You’ll earn around 4% to 5% APY on your money, and it will be 100% FDIC insured.

If the money that you have to invest is for retirement, or for long term wealth building, it’s okay to take on some more risk. You’re investing for the long hall, at least 5 years and probably a lot closer to 20 or 30 years down the road. If your investment goes down in the short term, it’s not a big deal because you won’t need that money for a few decades. If this is the case, you should not feel hesitant about investing money into quality mutual funds or rental real estate (if you really want to become a landlord).

Before you invest money any where that’s not federally guaranteed, you really need to do your homework. Make sure that you understand the investment and why it will make money. You also want to make sure that the investment has made money in the past and has a proven track record. Don’t put your money into any security lightly! It’s definitely worth contacting a fee-only financial advisor to help you choose your investments if you are not extremely comfortable with investing and business.