Money Bags

How Do You Preserve Your Money?

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Last updated on June 13, 2018 Comments: 25

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

Article comments

Anonymous says:

Nice article. (as always) Seniors have to look at things a bit differently. I’m at a point that I feel fortunate that I have money. I can’t worry about it and the multiple vehicles to add to the stash.

Anonymous says:

Buying Treasury Inflation-Protected Securities is not a bad idea.but I perfer to Invest in the stock market.

Anonymous says:

Interest rates were relatively coordinated with the rate of inflation.this is impossible without taking on some risk.It’s a problem.

Anonymous says:

In my opinion,Now is the best time investing in the stock market.

Anonymous says:

I faced the same problem when, about two years ago, I came across a random comment from someone on I think it was either Yahoo Finance or Motley Fool. The person asked if I (or the others in that conversation) had considered preference shares. I knew what preference shares were, but they never entered any conversation before. Worse, I was unable to see any quotes for them. Turns out you really need to know what you’re looking for to see them.

At first I thought, how boring is a preference share, whose price will never go through the roof like the next Microsoft or Amazon? I mean, the price hardly ever changes.

As it turned out, our company was doing business with several hotel industry REITs and, because I knew their ticker symbols I was able to track down their preference shares. Normally, these are issued at $25 and they stay roughly at $25 over their lives. And they pay a dividend of around $2 per year, fixed, whether the company makes money or not.

So… they yield around 8% per year. Not shabby at all. And they’re as close to risk free as dammit is to swearing. No common stockholder gets a dime until the preference stockholders get paid.

Best of all, when I heard about them, these shares were trading under $10! That’s not true anymore, but it was a no brainer then. even at normal prices, they are still the cornerstone of my investment portfolio, and they get the lion’s share of any new additions to the nest egg. No get rich quick schemes, just a little known corner of the investment business…

Anonymous says:

Making money is so difficult these days,so it’s very important to preserve our Money.thanks for the info.

Anonymous says:

i see capital as more of a boat in a river. You are either “working” you way up stream or you are going the wrong way. In this regard there is no preserving money. You are either gaining or losing.

Anonymous says:

Preservation of capital is an oxymoron the past few years, but I’ve got a 401k, traditional and Roth IRA, and I put some away in a money market in addition to your usual passbook savings accounts. However, I read in something Mark Cuban (of SharkTank and Dallas Mavericks fame) wrote to younger people about saving money. He said (and I’m paraphrasing), “The best way to save money is to pay off all your consumer debt, because there is no place in this world that will pay you the same rates as credit card interest rates while preserving your capital,” which I took to mean not playing the stock market.

Anonymous says:

I’ve got a 401k, Roth IRA & invest in the stock market. I am looking at investing in ETFs (gold, international, sector) and also looking at TIPS.

Anonymous says:

Savers have been punished with low interest rates for years now. I like the idea of P2P investing, as it seems some have made some good rates. However, for the emergency fund I will take my loss and keep it liquid.

Anonymous says:

I’m not at the point where I can think about preserving my money just yet, but have to stay on top of all the different options available. There’s always going to be people telling you different things. It’s just a matter of doing the research and making an informed decision on what’s right for your situation.

Anonymous says:

I have most of my invested funds with Vanguard, and they have a
Vanguard Inflation-Protected Securities Fund which mimics or buy US TIPs. Am I better off investing with Vanguard in this fund, or buying TIPS on my own?

Anonymous says:

Invest in silver. The silver market is at a plateau right now, but it won’t be for long. Industries are needing it more and more, and the fact that a very large percentage of it CANNOT ever be recycled will play a huge factor in the next couple decades to come. Also, since individual consumer demand is never as high for silver as it is for gold (and never as emotional), silver will always be the more stable investment. Just make sure the silver you buy is the real deal and of the highest grade (Johnson Matthey, Englehard) and DO NOT purchase silver off of eBay or similar sites. Go to your local coin shop or to a reputable website to make your buys. Silver Eagles are a good way to get started, moving up to 10 oz ingots (bars). If you have any kind of a safe in your home (gun vaults work perfect), storing a few ingots is no big deal. Let me tell you, four 100 oz silver ingots will supplement your retirement in 10+ years VERY nicely.

Anonymous says:

For me, preserving money is out the window. .5-1% returns do not cut it. I’ve had to take on some risk to get a return that beats inflation. That is why I have invested in Prosper and Lending Club.

Anonymous says:

I’m very lucky – I have about $200,000 in I bonds that have a fixed interest rate of 2% – 3.6% – I purchased these in 2000-2001 – the fixed interest rate on current I bonds – 0.0%

Anonymous says:

You lucky dog you. I’m jealous. I wish I started my IBond allocation then so I too could have gotten that nice fixed income part.

Back then the limit was much higher than now. The gubmint is slowly killing off IBonds.

Anonymous says:

Yup – I purchased $60,000 a year – got lots frequent flier miles as the United Credit card had a double mile promotion for much of this time.

Used these miles to get 2 First Class round trip tickets to asia.

Additionally, I would purchase near the end of the month – get the interest for that month but not have to pay until 30-45 days later.

All in all it was sweet!!!!

Anonymous says:

“How Do You Preserve Your Money?”

freeze dry it..

Seriously though, this has been my biggest beef for the past 3-4 years now. You have no choice but to go up in the yield curve and take bigger risks.

One item not mentioned typically in a discussions like this. Debt.

Take on debt equal or lower than the inflation rate. There are some low rate credit card transfers coming back that are under the 3% inflation rate. There are also mortgages before and after the tax rate deduction that are lower than 3%.

I personally have some business debt I’ve been paying off only slowly since it’s below the 3% rate. It’s pretty much free money then, and best to keep it as float.

IMHO I think it’s silly to be debt free exactly because of the average inflation rate we’ve seen in the past 30 years. The key part is getting low rate fixed interest debt.

For investments there is also:
– P2P Lending (one of my fav)
– munis
– corporate bonds
– dividend stocks
– MLPs

All of these are not without risks though. Some are fully valued currently because of the low FED rate. Investors already have no place to go and are piling onto the usual suspects.

Anonymous says:

Some good ideas in there. I’ve been hearing on CNBC that muni bonds are set to collapse. Any thoughts on that? I suppose it depends which munis you invest in–doing due diligence important.

Anonymous says:

Obviously a muni ETF/fund would help minimize this.

Anonymous says:

There are other assets that will grow along with or even exceed inflation. A few of them are art, collectibles, antinques and classic cars.

Anonymous says:

It is very difficult—-and even worse for my elderly relatives. They can’t afford the luxury of any level of risk. Occasionally local banks offer a high-yield checking account. It comes with a lot of hoops to jump through(usually in the form of making a lot of debit card purchases per month) but it can be good if you pay attention to details. It may mean buying a lot of packs of gum with a debit card!

Anonymous says:

What about Series I Savings Bonds? Limited to $15,000 a year but might be worth a look.

Luke Landes says:

The downside to I-Bonds is that they’re not marketable. You can’t sell them whenever you want, at least, not without losing part of the earned interest. A benefit of preserving capital, in my opinion, is being able to access it when needed without a fee, but that might not be as important for everyone or for every dollar of preserved capital. On the other hand, you won’t be taxed on interest until you redeem the bonds (unless you want to be taxed beforehand).

Anonymous says:

Great points.

There might be a rewards checking account available offering rates slightly above inflation but they’re few and far between. Also, they typically have balance caps around $20,000-$50,000 with rates subject to change at any time. My account currently earned 4% up until last year (currently a mere 2%).