Wednesday, June 1, 2011

When NOT to Save

Say what?  Yes, there are times when saving cash is not the absolute best way to hedge your future needs.  So let's backup and look at WHY we save cash in the first place.  Having a cash reserve shields us from sudden unavoidable expenses, like insurance deductibles (ding - paying that one on an MRI right now... oh yee-haw).  As a person committed to your own fiscal liberty, you should prefer paying cash (or interest free payments, like some hospitals will offer on big bills) over credit card debt any day because, as we have discussed, debt is the metaphorical equivalent of leprosy.  We also save cash to buy what we need in the near and medium term.  Food, home repair items, etc.  You can put it on your plastic as long as you have that non-negotiable discipline to pay it off every month, but paying cash bypasses the "oops - forgot to mail the payment on time" which means you getting hit with interest. Cash good - debt bad.

Hedging against future expenses is a good, sound doctrine and I can't recommend it enough times to you.  But, believe it or not, there are times when saving is a liability.  One scenario - you're not using a bank but a non-fire-rated safe and your house burns down.  Doh.  Two, harder to notice, the value of your currency is tanking and driving up commodities.  Great time to NOT save.  Why?

Let's look at those commodities: wheat, rice, brass, copper, lead ....   These are things that have intrinsic value - much more so than paper money - which you can buy now as prices are rising and use later (instead of buying later) when prices are high.  Some things you might be enterprising enough to buy low now and sell high later when the items become particularly popular.   Wheat and corn futures were going through the roof this spring.  I myself don't use a huge amount of wheat products, but a friend likes to bake bread.  Talking it over, I shared with him what I knew about wheat rust and current efforts to secure a rust resistant strain as well as the market pressure to produce more corn (for ethanol), which reduces the acres of wheat planted, driving up the futures (projected contracts to purchase from farmers at harvest time).  So my buddy got a 5 gallon bucket, went to the bulk store and socked away enough wheat flour to last him a few months till things shaped up.  Smart move.  He bought low and will be making his bread (good stuff, by-the-way) at the purchase cost "today" rather than the future market price which will be higher.

If I had been taking my own advice, I might have bought more corn seed last fall instead of shelling out several dollars for an envelope of sweet corn seeds this spring.  Corn meal might have been a good buy-and-freeze food item as well.

So, be paying attention to the costs now and projected costs later of the things you buy and use regularly.  Costs appear to be going up, even a few percentage points?  Check that against your savings rate.  Right.  If you can buy and hold and save 5%, you're beating most savings accounts right now by 4.5%.  Good time to buy rather than save, I'd say. 

Not sure if food prices are going up?  Just watch what Wal*Mart says about it's future projected earnings.  Sometime they will even come out and tell you - expect to pay more in the coming months.  We're already paying more, just not seeing it.  Notice how frozen pizzas have been going on a diet lately, but cost the same?  That's one way the seller can keep their price constant and appear to not be charging more but in effect sell you less, offsetting their cost increases.  Sooner or later, though, we'll realize a 3" square of 'za shouldn't cost $4.

That's not to say you STOP saving. You simply take a percentage of your money you normally save and redirect it to commodities you'll be using during the projected price peak.   I mentioned at the top of this story that a weakening currency is another time to not save.  What then?  If practical for you, it's not a bad time to invest in another currency.  The British Pound Sterling is a historically very stable currency, typically out trading the US dollar.  If you see a sudden down turn in the dollar, and you can use a variety of indicators to help you see this - oil being a good one - buying into a more stable currency can help you weather the storm.  If you see confidence returning, sell off your foreign holdings promptly so your profit is maximized before the dollar rebounds too much.

You can also purchase physical assets.  Believe it or not, aluminum is a decent investment, as is copper.  Just keep it locked up and don't talk around too much - it's also all too easy to steal and turn in for recycling money and not all recyclers bother to check to see if the item is stolen.  Buying shares in copper or aluminum funds or futures contracts themselves (more volatile, require more attention and trading skill to profit on) is a fairly good way to insulate your cash value.  You can typically profit as the dollar declines.  Silver is a good recent example.  I bought in at $14 or so about three years ago and sold at $22.  Profit.  If I'd held on till this past May however, I could have sold at $40.  The indication here is that, against silver, the dollar continues to be less favored (weaker) and buying into the metal is a better place to park cash.

FYI - $40 is about the historic high for silver set back in the 1970's.  It's not the best price to buy at, as a result - that would be buying at the historical highest value hoping it reaches unprecedented heights so you can sell and profit.  Check around, see if you can find something not presently trading at a historic high but shows a little upward movement trend over the past several quarters and consider that as a medium term investment.

Now - let's level set this for a moment.  The advice I'm giving above is ALL experiential.  I am NOT a licensed broker and can NOT give you investment advice.  I'm telling you what I observe and think about things.  IF you think you should be investing, get a GOOD financial adviser.  I recommend Raymond James & Associates as being the best bang for the buck, most risk adverse and willing to listen.   This is not a paid advertisement. I use them and trust them and have managed to put together a growing retirement fund with them.

Take home points: watch the value of the dollar, be familiar with commodities you buy regularly, decide when it's right for you to over-purchase as away to preserve your cash value as opposed to just saving.  Use a licensed adviser and/or broker if you want to get into the markets.  Finally, cover your bases first - make sure you're not hurting your ability to pay your bills and save for the known unforeseen items (add up all of your insurance deductibles and make sure you SAVE that at the very least!)

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