The effectiveness of microcredit was the topic of a recent Wilson Quarterly article by Karol Boudreaux and Tyler Cowen. Microcredit, in essence, involves small loans made to desperately poor people to help lift them out of poverty.
We Westerners in the developed world tend to accumulate and save our wealth in monetary forms: bank accounts, CDs, stocks, etc. But in developing nations people handle money very differently, Boudreaux and Cowen say:
A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. ... Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can't ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable meat or simply eaten.
That all makes lots of sense for that environment. But it made me think about what we Westerners do with our money.
Many people let piles of it accumulate in bank accounts, where it tends to grow slowly, remaining essentially in the form of cash.
Others simply spend whatever money comes their way -- and then some, via convenient credit cards. If this is you, you're taking your valuable dollars and turning them into televisions, cars, pedicures, golf games, and fettuccine Alfredo. Do those purchases really represent what you want to do with your money? If you're racking up credit card debt, then you're using your dollars to dig yourself into a deep hole.
There are other forms your money can take -- forms where it grows into more money, instead of sitting in your garage, closet, den, or belly.
Dollars can grow dollars
Some people invest in real estate, buying homes as investments. This can be quite effective, but it presents some drawbacks, too: having to manage properties, pay for repairs, deal with tenants, and be at the mercy of the housing market. The upside is that your dollars can multiply into many more dollars when invested in real estate. Turning your dollars into a house can be worthwhile.
Other people invest in stocks and mutual funds, exchanging their dollars for small portions of public companies. For long-term purposes, this is one of the most effective forms in which to keep your money. The stock market has grown by an annual average of around 10% over the past decades -- enough to turn $10,000 into more than $100,000 over 25 years. An investment in a simple S&P 500 index fund can shoot for such a return. Many companies, including Pfizer
Many managed mutual funds have market-beating track records and prospects. An average return of 12%, just two percentage points above the market average, is enough to turn $10,000 into $170,000 in that same 25-year period -- considerably more than the market tends to deliver.
You can find such funds on your own, perhaps by digging through gobs of funds at Morningstar, or you can let us help you by introducing you to some top-notch funds via our Motley Fool Champion Funds newsletter service. (Try it for free and see for yourself. I've found a bunch of great funds for my own portfolio there.)
Next time you're about to part with some of your money, take a few minutes to reflect that you're simply converting that cash into another form. Ask yourself whether it's an effective form for your money to take. Will it keep its value, increase its value, or quickly lose its value?
