The Saver's Worst Nightmare: Inflation

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Saving money carries risk these days. Inflation is a real concern for the first time in years: The dollar is hitting all time lows versus foreign currencies, gold is hitting highs versus the dollar, and oil is hitting new highs in dollar terms. What do all three of these examples have in common? For the same dollar amount, you are able to purchase less Euros, ounces of gold, or barrels of oil. Your dollars have less value and are able to purchase less.

Foreign countries have been noticing this trend. Most recently (as of 11/18/07), OPEC is considering converting their cash reserves into non-dollar currencies. While some of their motivations are purely political, part of their consideration is driven by the unfortunate fact that the dollar is not the best store of value at this point.

Will Inflation Stop & Give Us Savers A Break?

Is the inflation going to get better soon? Most likely not. Interest rates are still at lows and are not going to go up anytime soon. Greenspan, throughout his tenure as Chairman of the Federal Reserve Board, lowered interest rates to all time lows to stimulate the economy. He definitely succeeded in stimulating the economy and also lowered interest rates to the point where many mortgage lenders ended up taking on risky loans and many mortgage borrowers ended up getting in over their heads. Now in face of a subprime mortgage crisis, our new Chairman of the Federal Reserve, Ben Bernanke, is continuing Greenspan's legacy. As mortgage banks go out of business due to bad loans going into default, Bernanke has been forced to lower rates to keep the mortgage industry afloat. With continued low interest rates and an inability to raise rates, we are likely headed into a period of continued inflation.

How Should I Alter My Savings Strategy For Inflation?

What does all of this mean for very hard working money savers like you and me? It means we better carefully evaluate which store of value we use to hold our savings. Historically, financial advisors have championed the idea of placing short term savings (money that will be needed in the next three years) into short term investment vehicles such as cash, money market funds, and CDs. At the same time, longer term savings should go into more risky asset classes such as stocks, bonds, and real estate. In general I agree with these classifications however I urge all savers to reconsider hedging your bets in the short term. Instead of placing all short term assets in cash, why not place 10 percent in oil, gold, foreign currencies, and/or foreign stocks? Most importantly, I definitely urge money savers to evaluate long term savings through this inflation framework and place long term savings in vehicles that shelter against inflation.

In the short term, I am personally saving very hard to own my own house. I am saving as much as I can for my first home loan mortgage down payment. With the dollar at lows, gold at highs, and oil at highs, I am concerned about placing all of my hard earned short term savings into dollar denominated interest bearing accounts. The solution? I keep most of my short term savings in an Emigrant Direct high yield savings account but am also hedging my bets with 10 percent in oil and gold stocks. This 10 percent hedge helps me sleep at night, especially because my short term savings may actually not be so short term (It may end up taking me more than three years to save for my entire down payment although I certainly hope not).

As for my longer term assets (including my emergency fund), 95 percent are in stocks and commodity backed securities, both domestic and international, because these are a great hedge against inflation. As the dollar depreciates, these companies can just charge more dollars for the same product. The long term is where savers have the opportunity to really lose in face of inflation. This is where we really need to be careful and evaluate our investment choices wisely.

Consult Your Financial Investment Advisor

I am not a licensed investment advisor and this is purely my opinion. I urge you to consult your investment advisor before making any changes to your strategy. The most important lesson from this article is to start researching and thinking about inflation. It's something that's not widely discussed in media because it makes a bad name for economy. Denying a sticky issue is always easier than facing it. If you face inflation and come up with your own plan, you will be ahead of 99 percent of savers and will be taking your money saving skills to the next level.

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