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How Do You Preserve Your Money?

This article was written by in Economy, Saving. 19 comments.


Preservation of capital is an important aspect of any financial plan, but in today’s economy, this is impossible without taking on some risk. At one time, you could confidently place any money you might need within one year in a high-yield savings account and be relatively confident that your money could buy at least as much a year in the future than it could buy the day you deposited your funds. Interest rates were relatively coordinated with the rate of inflation.

That’s not the case today. The Department of Labor released the latest inflation data. It should be no surprise to most consumers that the changes in the price of gas led to an increase in the energy index of 3.2 percent over the last twelve months (ending February). The inflation rate for all items is 2.9 percent. While the government-reported inflation rate doesn’t translate to the actual increase in expenses any one individual experiences year over year, it’s the best benchmark we currently have for a generalized view of the increase in prices.

And it’s the measure we use to determine how much purchasing power savers lose. If your savings account isn’t earning at least 2.9 percent after tax, you’re losing money in real terms by placing it in a bank. With banks offering less than 1 percent interest before taxes on their best high-yield savings accounts, purchasing power losses accelerate. Placing your cash under a mattress to earn zero interest is a worse idea, so are there any other options providing a safe way to maintain purchasing power?

Money BagsNot really. Using a savings account is great for funds you might need in an emergency, because you can access the money quickly without worrying about selling an asset. Savers have to understand that having an emergency fund is a compromise; in return for the safety of an FDIC-insured account, savers waive the right to preserve real value, at least in today’s economy.

Any other options for preserving capital introduce risk.

  • Investing in the stock market. Despite some recent frenzy about the stock market, with prices of the major indexes reaching near-term highs and day-over-day increases exceeding the best-performing day of the year thus far, there have also been daily price decreases reflecting the worst performance of the year. The stock market is incredibly volatile. For the long-term, it’s a good place to be, but there’s no guarantee that your capital will be preserved for when you need it.

  • Buying real estate. For years, families saw the house they live in as a way to store their wealth. The belief was unfortunately based on the myth that real estate values never decrease. Well, any asset can find itself in a bubble, whether they be tulips, stocks, or houses, and people who relied on real estate’s ever-increasing value to make a living have had a difficult time in recent years. It’s been terrible news for real estate flippers, but the effects hit single-house homeowners just as hard.

    Although timing the market is always dangerous, with low prices and low interest rates, if you can qualify and if the time is right for your family, now could be the right time to buy a house, particularly if you’re looking to live there for a long time.

  • Buying Treasury Inflation-Protected Securities (TIPS). You can buy this investment product directly from the U.S. Treasury. Twice a year, you receive interest as well as an adjustment to your principal balance based on the inflation rate. This is basically a bond that will only lose value in the event of deflation. If you must sell TIPS after the value has dipped below your initial investment, you will still receive your full initial investment back.

    There’s no risk in losing money, and this is the closest you might be able to get to true preservation of capital during inflation. Keep in mind, however, that the government’s reported inflation value doesn’t necessarily reflect any one household’s experienced rate of inflation. The government’s rate used for calculating TIPS adjustments, the CPI-U, uses the prices of a combination of goods that weights items in a way that might not be relevant to most consumers.

  • Buying gold. Investing in gold is traditionally a good way to hedge against inflation, but the price of gold fluctuates. Like all commodities, the value of gold at any particular time is subject to the whims of commodities traders. An investment in gold is not as stable as its reputation. The price fluctuation may be due to fluctuations in the value of the dollar or of any other fiat currency, but the cause is irrelevant because the U.S. dollar is the world’s standard for currency, and if that ever changes, it would be another currency or combination of currencies that becomes the standard, not a commodity like gold. The days of the gold standard are over.

    Furthermore, most people who invest in gold use ETFs or mutual funds due to convenience. It would be inefficient and expensive to store and secure a significant amount of physical gold bars. Once you are dealing with electronic trades rather than a physical manifestation of metal, you’re subjecting yourself even more to the whim of the financial industry.

With low interest rates and increasing inflation, this may be a good time, from a financial perspective, to borrow money. You can do more with someone else’s money, repaying the loan with money valued less in the future. Borrowing money is of course not a good idea for people who could find themselves in trouble with debt, as interest costs could spiral out of control, but if you look at the numbers, borrowers are getting a much better deal, relatively speaking, than savers.

In today’s economy, if you are preserving your money, how are you doing so?

Photo: Lord Jim

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Boost Your Human Capital: Stay Healthy

This article was written by in Health. 7 comments.

It’s easy to focus on the personal policies that help improve your net worth immediately. Saving money, investing thoughtfully, and earning income affect your bottom line immediately. This view can be shortsighted occasionally. Focusing effort on your personal human capital can have a greater affect on your net worth over the course of the rest of your life. There are certain things anyone can do to improve the probability of being financially secure in the future. Focusing on your health can ensure you’ll have many income-earning years in the future.

There is much about your finances you can control, but some circumstances, while they can be prepared for, are difficult to predict. The same is true about health. The best anyone can do is take good care of his mind and body to reduce the chance that health will be a major concern.

Get health insurance. If you do not have a job that offers group health insurance and do not have access through a family member, finding coverage can be expensive. When I left my corporate job last year, I investigated prices for individual health coverage in New Jersey, and coverage similar to what I had at the company cost over one thousand dollars a month. Basic coverage was significantly less, but the benefits were not as comprehensive as what I had with my prior HMO plan. When I left the job, I had access to COBRA coverage, which extended the same coverage I had, but the premiums were no longer subsidized. The monthly fee was expensive, but manageable.

Jogging GirlsDon’t make any insurance payment mistakes. If you are paying for health insurance coverage on your own, create an automated payment plan. One missed payment can give the health insurance company cause to cancel your coverage.

Reduce your intake of unhealthy food. You don’t have to be a health fanatic. You can make some easy changes to your diet that should improve your health over the long term. For the most part, I no longer drink soda, opting for water instead. I don’t consider myself a health expert, and there are still many improvements to my diet that could result in increased health, but my plan for now is to be more conscious about the food I eat.

Stay active. If you’re not an athlete, there’s no need to undertake a massive campaign for exercise. If you have a job that keeps you sitting at a desk for most of the day, though, consider compensating for a sedentary lifestyle by taking some time to keep your muscles active. I joined a gym recently and I’m still looking to find a routine that works for me. I have lost some weight and I feel healthier in general. The challenge is maintaining this with a work and travel schedule that keeps me busy, making it difficult for me to set aside regular time.

I don’t always recommend joining a gym, though. Some people may find the environment motivating, but for others, it will cost less money in the long run to exercise independently, without a monthly fee. The most important aspect is to stay active, regardless of how it’s accomplished. Even if you find the best way for you to stay active is to join a gym, spending that money now to stay in shape could pay off in the future through improved health.

Get good sleep, quality and quantity. I combined a good mattress, good sheets, and good pillows and was halfway towards improving my sleep. Throughout my life, I had never really achieved quality sleep. As far back as middle school, I often stayed up late at night computer programming and running a bulletin board system. This lasted throughout high school. In college, I spent my days in class, studying, and practicing, while spending many nights designing and maintaining websites. Later on, my time outside of my day jobs was also spent working on websites. All of this left very little time for sleep, and the sleep I did get wasn’t comfortable.

I didn’t have to spend a lot of money to fix this problem. Finding the right mattress took some time, but I’m satisfied with the one I have now. I discovered that “memory foam” pillows don’t bother my neck and back as other pillows. Someone introduced me to cotton jersey knit sheets, and I find these much more comfortable than other cotton or satin sheets. Once I was able to combine this with seven to eight hours of uninterrupted sleep every night, I wake up refreshed and I can get through everyday without becoming exhausted.

From Forbes:

Talking of getting a good night’s sleep — critical for boosting memory — the key is to let melatonin do its trick. That’s a versatile hormone produced by the brain. It synchronizes the biological clock, regulates sleep and is a powerful antioxidant. Scientists believe it strengthens the immune system and has a strong link to preventing depression, cardiovascular disease, some cancers and sexual dysfunction.

Visit your doctor and dentist. Just having insurance isn’t enough. Visit the doctor twice a year for check-ups and get any tests appropriate for your age. The same applies to the dentist. When I was in college, I don’t think I visited a dentist once. I returned to my home state of New Jersey several months after graduating to work at my new job, and after receiving insurance, I made my first appointment with a dentist in years. It was a good thing my teeth and gums weren’t in worse shape than they were. Flossing and brushing keeps gums healthy, and healthy gums help increase the chance of maintaining the health of the rest of your body.

Quit smoking (or don’t start). While everyone seems to have an anecdote to share about a two-pack-a-day smoker who lived beyond 100 years, this isn’t the norm. You can improve your health — and your short-term finances — by quitting smoking. You’ll save money today, you’ll be healthier so that you can continue earning money, and you’ll feel healthier. Quitting may not b an easy feat, but all ex-smokers I know are happy they made the decision.

Manage your stress. I’ve never been more stressed in my life than I have been as a business owner. I’ve made my way through my life until this point generally avoiding stress, not letting myself get too emotionally involved in my work. It’s different when it’s my own business, and dealing stress has been difficult for me. I use relaxation techniques to help deal with stress, particularly when I know the situations that cause stress can’t be avoided.

Staying healthy can reduce your downtime at work and help you make the most of your income-earning years. Your health might help you extend those years, as well. While I get the impression that the media emphasize health too much, to the point at which unhealthy individuals as marginalized. In order to be healthy, you don’t need to look like an actor or athlete, but paying attention to these few core health principles can be worthwhile for anyone interested in being financially secure. A good attitude towards health and a few healthy habits can increase your human capital.

Photo: mikebaird

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High-Yield Investing In a Low-Yield Environment

This article was written by in Investing. 13 comments.

This is a guest article by Investor Junkie, focusing on alternative investments. This is a broad topic, so this article functions as a brief overview. There are many ideas within that deserve deeper explanation, something I’ll consider for future articles here.

Market turmoil is all around us. Last week, the 10-year US Treasury bond went below an unheard-of yield of 2%. Recently, the Federal Reserve formally announced that it will be keeping the Fed funds rate between 0% and 0.25% at least until June 2013. Savers are being punished, and traditional fixed income investments are yielding nothing. Investing for yield in this environment is very difficult. Where is one to turn to get some yield when a 5 year CD yields less than 3%?

In addition, inflation is expected to be around 3% this year, so any investment that yields less than this you are losing money in real terms. What are your options in this low yield environment? You do have no choice but to go up the yield curve. I won’t lie; some alternatives are risker than fixed income traditional fixed-income investments, though most have a low probability of default and generate much higher returns than government-secured investments. One could argue investments yielding less than the expected inflation rate is a risker investment. I would personally rather hold my money under my mattress than investing in a 10-year treasury bond.

Tokyo Stock Exchange InvestingThat being said, what are the options? Some are traditional investments, and others are alternative investments that you may have not considered previously.

  • Peer-to-peer lending
  • High-yield corporate bonds
  • Ginnie Mae bonds
  • I-Bonds
  • Municipal bonds
  • High dividend stocks
  • REITs
  • Master limited partnerships

Here is a brief summary of each of these.

Peer-to-peer lending

I’ve been investing with the peer-to-peer lending (P2P) service Lending Club for over two years. To see my process, read my Lending Club review for the details. So far I’m very happy with my 11.49% net annualized return. Peer-to-peer investing isn’t perfect though, and it is still a very new investment class. It has potential to be a viable alternative to high-yield corporate bonds, with possibly less risk. If we do see another recession, it’s possible P2P loans will default more frequently, and increased defaults will decrease investment returns.

High-yield corporate bonds

High-yield corporate bonds, otherwise known as junk bonds, offer higher yields than traditional government bonds and can be 3% to 4% higher than government fixed-income investments. Of course, the higher yields come with higher risk and have a higher chance of default. Unless you are investing six figures, you are best to diversify in this category via mutual funds or ETFs focused on these investments rather than buying individual junk bonds.

Ginnie Mae bonds

Ginnie Mae bonds are federally-backed bonds that offer higher rates than traditional government treasuries. With Ginnie Mae bonds it is often best to invest via mutual funds only because most investors will not have the capital requirements to buy directly. I discuss about Ginnie Mae investing in more detail on my blog.

I-Bonds

I’m a big fan of U.S. I-Bonds, and for the next 11 months these investments offer at least a 2.51% annualized return. That rate could be even higher depending upon the CPI calculation in October. Like government TIPS, I-Bonds follow the inflation rate. There are no state taxes to pay on interest. Federal taxes are only paid when you cash out unless the bonds are used to pay for higher education, in which case they are tax-free. Unfortunately savings bonds have an annual purchase limit, and the U.S. Treasury Department just announced an end to paper-based savings bonds. Next year, the maximum you can invest is $5,000 per Social Security number.

Municipal bonds

For higher-income individuals, muni bonds offer a decent after-tax return with a historically low chance of default. Unless you are investing six or more figures you are best to diversify via a mutual fund. Muni bonds typically offer 2% to 3% higher returns than federal government investments. The primary advantage to muni bonds is the lack of capital gain taxes, though in this low fixed-income environment, individuals in lower tax brackets might want to consider them as an investment.

Dividend stocks

Many dividend stocks have a higher return than government treasuries. You also have the added benefit of the stock possibly increasing in price over time. There are dividend ETFs that can diversify your investment. I personally like the dividend aristocrats, which have increased their dividends every year for at least the past 25 years. These might be considered boring stocks, but they typically offer decent returns for the long haul.

REITs

Real Estate Investment Trusts (otherwise known as REITs) are publicly-traded real estate companies. You can invest directly in a specific REIT or via a mutual fund or ETF. With the decline in commercial real estate prices, it might be a good time to get back into specific real estate sectors, and these investments have an almost inverse correlation to stocks. Traditionally REITs have offered a stable 6% to 7% return. REITs are typically best held in tax-deferred accounts because the investor’s profits are generally considered ordinary income rather than capital gains.

Master limited partnerships

This is one of the rarely-discussed investments that generates a consistently high yield, and low to payout in taxes. Master limited partnerships (MLPs) are similar to real estate trusts, but are usually best to invest in taxable accounts. Most MLPs are companies related to the transporting of commodities, such as natural gas and oil pipelines. Typically, their pricing is not related to price of the commodity itself, but based upon the transportation of that commodity. If you do your taxes yourself it might not be a good option to invest your taxable money. MLPs can be complex when filing your personal tax return. I discuss more about MLPs in detail on my blog.

To diversify your risk, one could invest in many of these above investments, and still yield a decent return that’s stable. This article is meant as a summary of possible investment options than can generate some yield. Please do more research before investing any of the above options. With any investment you should always determine your risk, and if unsure contact a professional. In case you didn’t know, all investments have risks. Past performance does not guarantee future returns.

How are you investing in this low yield environment?

tenaciousme

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When Does It Make Sense to Pay More For Quality?

This article was written by in Shopping. 10 comments.

My brain is slowly re-wiring itself now that I’m finally free of credit card debt, and I’m wondering about things that I never seriously considered before. I remember many years ago talking with a friend who tried explaining to me that it made sense to spend $600 on a pair of shoes, if they were high-quality enough to last for decades. At the time, I rejected that idea immediately and, I thought, forever. After all, they’re just shoes.

But now, I’m allowed to think about paying more for higher quality in additional areas of life, and I find that I want to think about it before spending money on just about anything. Maybe shoes can be worth $600, maybe it’s worth it to have a suit tailored exactly to my body, maybe there’s a good reason one hammer costs twice as much as the hammer hanging right next to it.

For example, last week we bought an oscillating lawn sprinkler. In the last seven years we’ve bought probably seven or eight sprinklers, some of them fancier than others, but none of them what you’d consider high end (at least not if you’ve done the research I just did). Last week’s sprinkler probably cost just over $10 after tax. We tried to set it up in the yard and we simply couldn’t figure out how to get it to spread the water out in the right pattern. It’d get stuck in one position, or only go up halfway before coming back down. The controls didn’t make any sense, and when we tried to get it to stop spraying upside-down, it broke.

After we gave up, I did some research at the Home Depot and Lowe’s websites, and cross-referenced their options with sprinkler reviews at Amazon, and I found two surprising facts: 1) neither Lowe’s nor Home Depot sell sprinklers at my local stores that are well-reviewed on Amazon, and 2) it looks like you need to spend at least $35 for any sprinkler that is well-reviewed.

Actually, I learned a third surprising thing: a person could theoretically spend almost $2,000 on a lawn sprinkler. I didn’t get that one, I got the first one I could find with more than a couple five-star reviews, which ended up being $37.80. It still seems like a lot to spend on something that should be easy to make cheap, but according to several reviewers, this is a brand that can last up to ten years. In other words, it goes against the “they don’t make ‘em like they used to” concept.

I tested the new sprinkler just now, and it worked right the first time, due in large part to controls that make sense. So, I’m adding sprinklers to the list of things I’d pay more for, in addition to video and photography equipment, computer hardware and software, trash cans, wine, coffee, power tools, haircuts, mattresses and bed frames, cars, air filters, pet care, vacations, exercise equipment, and dinner ingredients, not to mention the occasional visit to a nice restaurant.

But there are still some things I will always buy the cheap version of, if only because I tend to lose them. That’s being generous; I always lose them. Sunglasses and fingernail clippers, for example.

I’m still not so sure about shoes, though. What did you used to buy the cheap version of, before you decided to spend more on quality?

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Start the Decade Off Right: Open a High-Yield Savings Account

by Flexo

It’s a new year and a new decade. I expect the next ten years will fly by and 2020 will be here before I know it. Thinking about how fast the future is barreling towards the present is inspiring me to start making real changes in my life, and if there is an opportunity to ... Continue reading this article…

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How is Your 401(k) Retirement Account Performing?

by Flexo

I’ve been investing in a 401(k) retirement account since I joined the ranks of the corporate employed seven years ago. I started with a small percentage of my income, just enough to take advantage of the full company match. As my income increased, I diverted a larger percentage to the 401(k) with the hopes of ... Continue reading this article…

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Can an Emergency Fund Be Too Big?

by Flexo

Being prepared for financial emergencies is a primary step on the path to creating and maintaining solid footing, but as with other good things, too much of a positive can be negative. Every individual’s or family’s situation is unique, so it’s difficult to prescribe a hard and fast rule about the right size of an ... Continue reading this article…

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FDIC Might Be Underfunded: Should You Withdraw Your Money From Banks?

by Flexo

The Federal Deposit Insurance Corporation (FDIC), the federal organization that insures that customers do not lose deposits held at banks when those banks run into trouble, is finding itself in trouble. For years, Congress hasn’t allowed the FDIC to collect insurance premiums from banks, bowing to the strong banking industry lobby. Now that banks have ... Continue reading this article…

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