Are we losing money in HBSC, ED and ING type of accounts ?

[Russell]

I didn't know the inflation rate was this high http://inflationdata.com/Inflation/I...tInflation.asp or maybe the data is flawed ? But it really got me thinking.

If your current ED rate is 4.5% and you're in the 25% tax bracket you're really only making 3.375% on your money. If the inflation data above is correct that shows the inflation rate much higher than 3.375% for the year 2006 so far (Feb). Even in the lower tax brackets you may just be barely keeping up with the inflation.

[34saving]

It wouldn't surprise me at all if online savings accounts aren't keeping up with inflation. Historically, cash is one of the worst investments you can make. Richard K . . .I have no hope of spelling his last name . . .Rich Dad Poor Dad guy . . .recently said on PBS that currencies are designed to decrease to 5% of their original value over 40 years. He says to invest in gold, silver, and oil (historically he's also been into property). The only problem? Those haven't always held their value either. If you come up with a really grand solution of where somebody should be putting her money let us know Personally, I dunno . . .

[sweeps]

The math will vary depending on your personal situation. For example, even though someone may be in a 25% tax bracket, rarely do they actually pay that much in taxes due to deductions, credits, etc. etc. Some people actually have a negative tax rate. Also the inflation rate is an aggregate number -- inflation affects everyone differently based on what things you buy (college tuition, for example, goes up faster than the general inflation rate; computer prices tend to deflate over time).

But your point is right on. You're not building any wealth if all your money is in high-yield savings accounts. You must invest in other things (stocks, bonds, real estate, your own business, etc.) to get ahead.

[Ima saver]

Well I bought some gold (very little) coins thirty years ago. I can barely get back what I paid for them. I guess I will stick to mutual funds and stocks. I have to keep a lot of cash in a savings cause I pay cash as we build spec houses.

[Russell]

34saving, I wish I had a grand solution...although I think you're on to something there with the realestate stuff. I'd love to get into it too but the CA market is just not allowing me to get my feet wet.

Sweeps, I know what you means. My effective tax rate for 2005 was 18% despite being in the 25% tax bracket. In 2006 though it might actually be 25%.

Ima, I know you and many others have done well with MFs and stocks but my experience hasn't been that great with them. I have made some money with MFs in my 401k but stocks is quite dfferent in todays market. The buy and hold strategy doesn't work anymore. I used to have Ebay in 2001 which I sold towards the end of 2001. I've seen their prices go up and then back down to the 2001 levels over and over again in the last few years. So you really have to jump in and out of the market to make any money which is not easy to do as a passive investor. I tried the Vanguard's S&P 500 index and my returns for the year were around 2%...I wish there was an easier way.

[34saving]

I guess I shouldn't feel bad that my effective tax rate was 5% (up from 3% last year). I know what you mean about the stock market. I think real estate is kind of dangerous right now too though. Foreclosures are already up and there are going to be a whole lot of people who aren't happy when their ARMs adjust. Most importantly, I think a lot of the real estate investors who just got into it in the last few years are getting scared and jumping ship. Of course, if you're in it for the long haul that probably means you can pick up some bargains and there will be more tenants around since fewer people will be able to afford financing after their foreclosure. I guess it's a glass half empty/half full kind of thing.

[jmjj215]

34, don't you see the potential rise in foreclosures due to ARMS/interest-only loans as a possible buying opportunity? I know one guy in particular that is just sitting on his money waiting - he sold 9/10 of his properties a year ago or so - and he's just sitting there waiting to snatch them up cheap.

Russell, if you have the mental, emotional, and spiritual (maybe not spiritual) capacity, try your hardest to follow the advice of Buffett: "When everyone is being greedy, be fearful. When everyone is being fearful, be greedy." There are opportunities everywhere to invest.

[34saving]

Yeah, that what I meant to say when I said " Of course, if you're in it for the long haul that probably means you can pick up some bargains and there will be more tenants around since fewer people will be able to afford financing after their foreclosure. I guess it's a glass half empty/half full kind of thing." My written expression has been a bit lacking lately The hard part about foreclosure is that it really does lower the value of a property. I've looked at quite a few foreclosures and all of them have been disasters! ( . . .and these are upper end suburban homes, not meth houses and things like that.) It seems once people realize they're going to lose their home and their credit they stop caring and the next thing you know the place is falling apart. Now, Minnesota is a judicial foreclosure state, so maybe states with a faster timeline have less of a problem in this area. I do think there is money to be made in short sales, but that money is coming from the banks, which we all know will eventually come back to "we the people" in one way or another.

[Russell]

Jesse and 34saving, I too have been patiently waiting for the housing market to become the buyer's market again but its been 3 yrs and I'm still waiting...

[nixuzer]

Originally Posted by Russell

Jesse and 34saving, I too have been patiently waiting for the housing market to become the buyer's market again but its been 3 yrs and I'm still waiting...

Having interacted with some of you on other threads I might point out one, contrary point of view which is that I'd put my money in something other than cash that has the ability to become liquid fast if a buying opportunity comes along. Based on the statements being made by Ben B (Fed Chairman) my bigger concern is with inflation killing my money as it sits there in an account. VJW and I have had some interactions on this and you can decide for yourself. As to what to put your money in I'll let you wise people figure that out. Just ask yourself the following question: if inflation is high, property values decrease, foreclosures increase what traditionally is a safe place to 'store' your money?

[nixuzer]

Let me add that VJW has made a strong point for some things in the past that got me to do a lot of research and we still disagree on points but the one change I've made in my investment life is I'm less choosy on investment vehicles than I was in the past. To explain I don't care what the best investment is anymore (stocks, bonds, real estate, cattle, whatever) I just want to put myself in a situation for when the market changes I have the leverage to take advantage of those things quickly yet not destroying my investment 'dollars' at the same time.

[34saving]

I suppose gold is the traditional hedge here. My problem with gold is that it doesn't really have any more intrinsic value than currency has. Yes, I know historically it always has, but aside from making prettier jewelry why is gold intrinsically any better than copper? Of course, one could certainly argue that the intrinsic value of something has nothing to do with it . . .

[sweeps]

Originally Posted by nixuzer

I'd put my money in something other than cash that has the ability to become liquid fast if a buying opportunity comes along.

Such as?

[nixuzer]

Originally Posted by 34saving

I suppose gold is the traditional hedge here. My problem with gold is that it doesn't really have any more intrinsic value than currency has. Yes, I know historically it always has, but aside from making prettier jewelry why is gold intrinsically any better than copper? Of course, one could certainly argue that the intrinsic value of something has nothing to do with it . . .

Yes but has your money gained purchasing power or lost purchasing power over the last X # of years? We're not talking WalMart loss leader purchasing power here but in general CPI 'bread basket' type stuff.

[nixuzer]

Originally Posted by Sweepsplayer

Such as?

Well that is what I hesitated to give do to each persons situation being different (i.e. do they want to just sit the money there and do nothing or would they like to do a little dirty work and double their cash over a month or 2?). There are some things I can make really good return on my investment but it depends on how dirty I feel like getting. For example, if you want to put in extra time you can have a decent increase by purchasing hobby/side-business inventory that sells quickly...what is it you invest in depends on your hobby/side-business and if the item is perishable. Or how about food...you'll eat it anyway and when the next month hits you'll have more cash since you spent more the month before right?

To clarify I'd always recommend one month in immediate cash (along with your normal emergency budget items) and then everything past that in whatever short-term investments you can go after (since you'll have 30 days to liquidate the money based on your cash savings right). I used to think 6 months in cash due to my being an independent contractor but realized that the extra 5 months of cash could do significantly more going to work in other areas HOWEVER that is without the liability of employees, if I had employees I'd keep the other 5 months in operating cash reserves and forget the return on investment...always pay your people right?

Being on this saving forum most people here are probably not the ones needing to hear this but being debt free. There are quite a few people that I've encountered in my professional life (just through small talk at the customer site) that are into having $$$ in their savings/money-market account, investments etc. but carry balances on things. Considering they're paying that debt with after tax dollars that isn't a very good investment.

[jmjj215]

So I guess we're back to the ol' perfect ROI is paying off debt. I was hoping for something else I guess

[mbhunter]

Originally Posted by 34saving

I suppose gold is the traditional hedge here. My problem with gold is that it doesn't really have any more intrinsic value than currency has. Yes, I know historically it always has, but aside from making prettier jewelry why is gold intrinsically any better than copper? Of course, one could certainly argue that the intrinsic value of something has nothing to do with it . . .

Gold has a lot of things going for it that copper doesn't. It's rare, it's very easily divisible, it's dense, and it's chemically inert. And the government can't make more of it to inflate it like it can with fiat money

Gold isn't a perfect inflation hedge, but it's been used as money for thousands of years, and likely will, God willing, for thousands more.

[nixuzer]

Originally Posted by jmjj215

So I guess we're back to the ol' perfect ROI is paying off debt. I was hoping for something else I guess

Well I thought I gave something else (atleast a hint).

Example:
A friend is into wine so he started looking for wine deals and built a small wine cellar. He now has wine that he can sell within a week that will get him double his money on short notice (a week) and a better return if he could wait a little longer to sell. He has slowly been converting his cash savings into wine inventory. This is just one example of converting a large cash savings position into an inventory with opportunity for quick cash in a pinch. The key is to make sure that it can be cashed out quickly if necessary, not based on a positive attitude but actually trying to sell a piece of inventory at various times as a little litmus test.

[sweeps]

Running a business is a great way (the best way?) to build wealth, but it doesn't come without its risks. To use your example, nixuser, there are a lot of ways your friend's plan could backfire:
- The laws on selling or shipping wine could change, and he finds that he can't legally unload his inventory.
- A new study could come out showing that wine causes cancer or diabetes, causing demand for wine to plummet.
- An economic crisis could happen and people need food and water, not wine.
- His wine could be destroyed in a fire or earthquake, or stolen by someone. Will he be completely reimbursed by insurance and how long will that take?

The real answer to building wealth with minimal risk is to diversify. Have some money in cash at home under the mattress, some in a high-yield savings account, some in domestic stocks and bonds, some in international stocks and bonds, some in real estate, some in natural resources, some in your own business if you can. I know it's not as exciting as going for that 500% annual return each year, but it works.

[nixuzer]

Originally Posted by Sweepsplayer

Running a business is a great way (the best way?) to build wealth, but it doesn't come without its risks. To use your example, nixuser, there are a lot of ways your friend's plan could backfire:
- The laws on selling or shipping wine could change, and he finds that he can't legally unload his inventory.
- A new study could come out showing that wine causes cancer or diabetes, causing demand for wine to plummet.
- An economic crisis could happen and people need food and water, not wine.
- His wine could be destroyed in a fire or earthquake, or stolen by someone. Will he be completely reimbursed by insurance and how long will that take?

The real answer to building wealth with minimal risk is to diversify. Have some money in cash at home under the mattress, some in a high-yield savings account, some in domestic stocks and bonds, some in international stocks and bonds, some in real estate, some in natural resources, some in your own business if you can. I know it's not as exciting as going for that 500% annual return each year, but it works.

Actually the last two would have the same problem if you had cash also right? Especially the crisis..Katrina people didn't care if you had gold, cash, etc they just wanted food and water.

What about a new Fed chairman who makes the following quote? Is there a risk to your money there?

The U.S. government has a technology, called a printing press, which allows it to produce as many dollars as it wishes at essentially no cost.
Ben Bernanke

<Rant State="On">
No cost to the goverment however the cost to the consumer is, how is it they say in the Visa commercials, Priceless!
<Rant State="Off">