Even though many of us cannot live without them, credit cards were not always part of our lives. There was a time, just two generations ago, when consumers had to carry cash everywhere, or rely upon store credit. It took several decades for credit cards to become the integral part of our lives that they are for so many of us today. The story of how Americans fell in love with plastic is an interesting one.

The Beginnings of Credit Cards

During the 19th century, some department stores and hotels issued what were known as “credit coins.” These were nothing more than metal tokens issued to persons with credit accounts.1 The credit coin enabled a clerk to identify people who had credit.

The coins were replaced by metal cards called charga-plates in the 1920s. Charga-plates were the first credit cards in the United States, but they could only be used at a specific business such as a gas station or a department store.

A charga-plate was a metal card with the customer’s name, address and account number stamped on it. A clerk took an impression of the card when a purchase was made to keep a record. The purchase was put on a bill sent to the customer each month. Customers had to pay the bill in order to keep card.

The First Bank Card

The first bank credit card was created by John Biggins of the Flatbush National Bank in Brooklyn, New York, in 1946. Biggins created a system in which customers used a card he called Charge-It to make purchases at businesses. The bank paid the business and billed the customer monthly.

Charge-It was only available to local businesses in Brooklyn, but it was the first card that worked at more than establishment. It was also the first card issued by a bank rather than a business. Merchants were willing to take Charge-It because it meant the bank would handle all the paperwork involved in issuing credit.

The First Credit Card Company

The next step was the creation of credit-card companies, businesses that specialized in issuing cards. Two men; Frank X. McNamara and Alfred S. Bloomingdale, came up with the idea of a card that would pay for restaurant meals. McNamara started the Diner’s Club in New York City in 1950, and Bloomingdale organized Dine and Sign in Los Angeles the same year. The two soon met and merged their businesses into the first national credit card: the Diner’s Club Card.

The Diner’s Club proved popular. It had 20,000 members by 1951, just a year after launching. Diner’s Club was the first national card to charge interest, 7% plus an annual fee of $3, to make a profit.

The First Plastic

The Diner’s Club Cards were made of cardboard, but they were so successful that companies like Hilton Hotels and American Express took notice. Hilton issued its own card that became the Carte Blanche in 1958. In 1959 American Express brought out the first plastic card and created a national icon, the Amex card. American Express also created the first worldwide credit card network. Although they were made of plastic, these instruments were not credit cards in the modern sense. They were charge cards that operated on a closed loop. That meant consumers could only use them at a few businesses, often just restaurants. Since they were charge cards, users had to pay the balance off in full at the end of the month. That meant the cards were mostly used by the rich and people who travelled a lot.

Bank Americard and the Revolving Balance

The first true American credit card was the BankAmericard, issued by Bank of America in Fresno, California. Unlike the American Express or Diners Club, BankAmericard came with a revolving balance. That meant a cardholder only had to pay part of the balance each month. This made the cards useful to working and middle class families who might not be able to pay the whole balance.

Merchants were willing to take the card because they would get paid right away by Bank of America rather than having to bill customers and wait. BankAmericard was so successful that it was licensed to banks throughout the United States. The success of BankAmericard prompted Citibank to launch the Everything Card in 1967, and a competing group of California banks to start Master Charge in 1966. Master Charge and the Everything Card merged in 1969 and eventually became Master Card. BankAmericard is now known as Visa.

Credit Cards Go National

The basis of a nationwide credit network was laid in 1978 when the U.S. Supreme ruled that nationally-chartered banks could charge the same interest rate in every state. Before that, banks had to follow a complicated set of limits on interest rates created by state legislatures. This made it profitable for organizations like Visa and Citibank to issue credit cards nationwide. It also enabled banks to charge higher interest rates, which in turn enabled them to issue cards to middle and working class people. Advances in computer technology enabled companies to process transactions instantly with a swipe of a magnetic strip. This made it convenient to use credit cards at restaurants, supermarkets and other businesses.

Credit Cards Today

Today there are almost 200 million credit card holders in the United States. To put that in perspective, there are just over 100 million families in the country. In other words, the vast majority of American adults are credit card holders and credit and debit cards have completely eclipsed cash in terms of ubiquity. While we may be on the cusp of a new trend toward phone-based payments, such as those currently offered by Apple and Google, one thing is clear - payment by credit is here to stay.

One of the biggest reasons people don’t invest the money they have is the sheer number of different investment vehicles available and the complexities of each. It can be quite overwhelming, but the truth is most investors only need to know about a few of them. Let’s go over some of the most popular and easy to trade investments out there.

Stocks

Stocks are the first thing that come to mind for most people when talking about investing. A stock is nothing more than a share of ownership of a company, hence the term ‘share‘ being synonymous with ‘stock’. A person that holds 1% of the shares of a company effectively owns 1% of that company and is entitled to 1% of that company’s profits, which is paid to shareholders in the form of dividends, usually on some regular schedule for consistently profitable companies. The real underlying value of ownership is that a shareholder has a claim to all future profits. It sounds obvious, but that’s a point many amateur investors overlook, so I’ll say it again, slightly differently. The underlying value of a stock is the present value of all future dividend payments. It’s easy to get caught up in a rising stock and to value it based only on the hunch that down the line someone will want to pay even more than you did to buy that stock from you, but don’t fall into that trap. Eventually markets will become rational and the market price of a stock will tend toward what analysts believe is the value of the company’s profit stream.

Corporate Bonds

Bonds are nothing more than loans. When you buy a bond, you are making a loan to the writer of that bond. You are offered some predetermined interest rate for a specific amount of time on that loan, after which the loan must be repaid. While bonds are generally considered safer investments than stocks, they do carry a risk: there’s nothing stopping the company writing the bond from declaring bankruptcy and going out of business before it can pay the bondholders.

In fact, if you’ve ever heard the term ‘junk bond’, that’s exactly the case. Junk bonds are bonds issued by companies in very poor financial positions. They generally have to offer very high interest rates to get anyone to buy the bonds. If the company does end up succeeding, the bondholder gets a nice return on his or her investment from the high interest rate, but if the company fails it will likely never be able to repay the original value of the bond.

One last common type of corporate bond is a convertible bond. A convertible bond can be converted into common stock, generally at the bondholder’s discretion. This allows the issuing company to sell bonds with a lower interest rate by offering bondholders upside potential if the stock takes off and surpasses the face value of the bond.

It is worth noting that bondholders have a higher claim to the assets of a company than do regular shareholders. In the event a company is liquidated, all bondholders will be paid before any shareholders.

Municipal Bonds

Municipal bonds can be issued by private or public sector organizations to raise funds for public projects. The primary advantage of municipal bonds is that many are federal and state income tax exempt. This is of particular value to high earning investors (i.e. investors in high tax brackets) and investors in states with high income tax rates. Investors in more tax-friendly states or in lower brackets may prefer to seek out higher interest rates from bonds that don’t get preferential tax treatment.

Treasury Bonds

Treasury bonds are a lot like corporate bonds, except they’re issued by the United States Department of Treasury. Many consider this the closest thing to a risk-free asset. Even if the United States government finds itself in a dire financial situation, the treasury department has the ability to print money as a last resort to make good on its obligations. Because of this, don’t expect this financial instrument to do much more than help you keep pace with inflation.

Mutual Funds and Exchange Traded Funds (ETFs)

Mutual Funds and Exchange Traded Funds (which are essentially the same things, except rather than giving your money directly to the fund, you buy shares of the fund on an exchange) are incredibly popular investment vehicles. They allow ordinary investors that don’t have millions of dollars to still have a well diversified portfolio by indirectly owning tiny fractions of hundreds or thousands of underlying securities. A simplistic view of how they work is a fund manager picks a bunch of securities, buys them, pools them together, and then sells claims to fractions of that entire basket of securities. If a few individual securities in that basket do poorly, they’re still only a fraction of the entire basket. Likewise, if a few securities really take off, they can only pull on the entire basket by so much. Overall, the basket, or fund, should be much more stable and predictable than individual securities within the basket. That’s known in mathematics as the law of large numbers. This allows investors to get the higher expected return of risky assets, while mitigating risk through diversification.

There are two important classes of these funds: actively managed and passively managed. Actively managed funds have (usually highly paid) managers that closely study the securities within the fund and make changes as they deem appropriate and generally charge a higher fee. Passively managed funds (index funds), on the other hand, just blindly buy across a large group of stocks, for example the entire S&P 500, a bunch of stocks with high earnings relative to the price of the stock (value stocks), etc. While the former may sound smarter, consider the theory behind passively managed funds. The stock market is an efficient market and the price of a stock reflects its true value as determined by all participants in the market. If a fund manager says a particular stock is undervalued and should be bought, he’s basically making the claim that he’s smarter or knows more than everyone else on Wall Street. After all, if others agreed with that manager, they would also buy that stock, thereby driving the price up, until it was no longer undervalued. The argument for passively managed funds is that the market has done the research for you, for free. Why pay analysts big bucks to do unnecessary research?

There are certainly complexities to modern financial markets, but you don’t have to have a degree in Finance to understand enough to start investing. Most people don’t need anything more complicated than mutual funds or bond funds in their portfolio. One of the most overlooked risks to investing is letting your risk aversion allow you to forego growth opportunities. Taken to an extreme, i.e. holding all your savings in cash, will just allow inflation to eat away most of what you have if given enough time.

Investing can come in many different forms. The professionals on Wall Street use sophisticated analysis methods, and at times, take on significant risk to achieve their investment goals. For the average person, investing is a much different and much simpler process. The goal of retirement investing is to accumulate a large sum of money, over many decades, so that you can live comfortably for a long time after you leave the workforce.

Buy and Hold

A common and simple approach is to implement a buy and hold strategy. John C. Bogle, the founder of Vanguard Group, argues that the best way to retire comfortably is to invest in low cost, diversified mutual funds and simply leave them alone until you retire. A common mistake amateur investors make is to respond excessively to short-term market movements. When people see the market move significantly lower in a short amount of time, it’s natural to panic a little. Many people run for safety and sell at the lower market prices, thinking their investments are ‘trending’ downward and they need to stop the bleeding. The problem is, you don’t really know where the bottom is until it’s gone. Even Warren Buffett admits he can’t predict short term market fluctuations. What you can do though, is keep your costs low by investing in low cost funds, make consistent contributions to your retirement account, and only buy and sell to make strategic asset allocation changes (e.g. moving to lower risk assets as you get closer to retirement). Retirement investing is a long-term goal and you should treat it as such.

Diversification

One of the most important concepts in retirement investing is diversification. This concept is important because it will protect you from major losses should one of your assets rapidly deteriorate in value. The idea is to allocate your money across many different assets and asset classes (e.g. stocks, bonds, commodities, cash, etc.) so that if one asset class performs poorly it will not drag your entire portfolio down. This is nothing more than the law of large numbers you probably learned about in school. You take many uncorrelated (or loosely correlated) random variables (asset price movements), add them together, and you end up with something that has significantly less variance (risk) than the components taken individually.

Risk Management

If all asset prices were completely independent, you could mitigate virtually all risk simply by diversifying your portfolio. Unfortunately, that’s not the world we live in. We have home prices in one state that affect home prices in another. We recently saw a drop in home prices across the country cause a huge drop in average American wealth, which caused a drop in consumer spending and deeply affected many businesses. The stock market as a whole has its good years and bad years. Same for the bond market and same for just about any other market you can think of. That’s why it’s important to also consider the risk of individual assets within your portfolio. Bonds are generally considered lower risk than stocks. Within the stock market, larger, so called ‘blue chip’ companies are generally considered safer than smaller, newer ones.

Both 401(k)s and IRAs are very similar. They’re both accounts that allow you to defer taxes on contributions until the money is withdrawn. Where they differ is mostly in income and contribution limits.

Let’s start with the 401(k). This has the higher annual contribution and income limits of $18,000 (2016) and $265,000. That means if you make between $18,000 and $265,000 within a year, you can put $18,000 into a 401(k), have a taxable income of $18,000 less. In addition to your $18,000 limit, some employers choose to make a matching contribution, usually on only part of the $18,000. You won’t pay any taxes on the money you put into a 401(k) until you withdraw from the account, usually in retirement, at which time your withdrawal will be taxed similar to income as if it were earned in retirement. Workers over 50 can add an additional $6,000/year ‘catch up’ contribution to their 401k, for a total of $24,000.

IRAs are taxed the same as 401(k)s. The biggest difference is that you can only contribute $5,500/year (plus an additional $1,000/year if you’re over 50). There’s also a much lower income limit. Contribution limits are phased out for single individuals with incomes between $116,000 - $131,000 and married couples filing jointly between $183,000 - $193,000. That means if you’re single and you want to contribute $5,500/year, you must make at most $116,000 in income. Otherwise, you won’t be allowed to deduct the contribution, which is the whole point of having an IRA. A single person making more than $131,000 won’t be able to deduct anything, and someone with an income between $116,000 and $131,000 will be able to deduct somewhere between $0 and $5,500.

Traditional retirement accounts work as I’ve just described above. Roth retirement accounts, on the other hand, are a little different. When you contribute to a Roth IRA or 401(k), you don’t deduct your contributions from your taxable income. Why would anyone choose to do that? The trade off is that you can withdraw from the accounts without paying any taxes. If you think you’ll be in a higher tax bracket when you retire (maybe you’re going through a rough time now and you have unusually low income, or many deductions that you won’t have later, etc.), a Roth account is a good way to go. You’ll pay taxes on all the money while you’re in a low bracket and be able to withdraw tax free when you’re in a higher bracket later in life. Of course, that’s not the case for most people, especially for those able to contribute to a retirement account. Usually you contribute to your retirement account during your peak earning years, which are usually your peak taxable income years as well. For those people, a traditional account usually makes the most sense.

Once You Hit Retirement Age

Now that you have invested early and often, bought and held, diversified, and discovered which retirement accounts work best for you, it is time to enjoy the fruits of your labor. But what if you still have concerns about your money lasting as long as you do? This is where fixed income investments come into play. Fixed income investments are designed to provide you with a steady income with very little risk. If you are looking to boost your income well into retirement, these investments will work great for you. Bonds pay you a percentage of the total investment every year until maturity, when you are paid back the entire amount you invested. Annuities are another type of fixed income investment that are bought through insurance companies. These also pay out a fixed amount, and they usually pay out for the rest of your life but not a second longer. At the moment, bonds and annuities do not pay out large sums of money because interest rates are so low. A slightly riskier option that may offer a better return is to invest in low risk, high dividend stocks. Many retirees live off dividend streams and hold onto the underlying asset to leave to their heirs.