Saving is a key concept for those who would like to become financially independent or retire early.
Saving efforts put discipline to spending, increase conscious buying behaviour and obviously generate income and a stash for future enjoyment.
Normally all the above should hold true.
Unfortunately we do not live in normal times. We live in times of great financial unrest throughout the western world.
And this unrest imposes large threats to your saving accounts.
Let’s get a step back and see what is at the core of the financial crisis that is haunting us for 4 years now:
It is excessive spending at too low incomes, or in other words the accumulation of excessive debt at several levels in the economy.
At the beginning, the banks in the US were affected as they were sitting on bad debt out of insecure sub-prime lending.
This triggered some unrest throughout banks in the whole world, especially US and Europe.
Many banks had to be rescued by state governments, stretching their already large debt burden even further.
Then came a point where investors were no more willing to lend money to governments, especially not less advanced ones like Greece. The Euro complicated things, as it was not possible to let Greece default easily.
But don’t be misleaded, the main reason why default of this small economy is feared by so many is that again western banks would suffer huge losses and again there would be chain-reactions and the need for additional bank bail-outs. Very difficult to explain to voters these days.
I don’t want to discuss who is to “blame” – I think this is not realy possible and would not lead anywhere, as the whole economic system of the West is interconnected in huge debt burdens. So don’t lean back in the US and pointing at Europe, because the debt burdens of the US are not much better that of some of the european crisis states (see picture above). The US debt (or Garman debt as well) are just not in the focus right now, and debt crisis are a lot about attention, focus and psychology.
Too-big-to-fail-banks and the massively de-regulated financial markets play a very unhealthy role in this game, but don’t make your life to easy and simply blame investors or the “evil markets” for all the mess. Investors just don’t want to lend additional money to countries or banks that are obviously bankrupt already.
Or would you? If you want, the Greece government or US subprime-lenders are sure happy to take your money, so go ahead! But don’t expect your money to return in this life…
This brings us straight to the point of this post:
Whom should you lend your money?!
Because this is what you have to understand these days:
Saving pure money these days simply means lending your money to someone else.
The debts of some subprime-lender, of some near broke government or of a struggling company do exactly match your and other peoples savings!
Wherever there is a debtor (and there are many these days!) there also is a creditor, and that is YOU if you are on the saver’s side.
And wherever there is a debtor going broke, there is a saver who is loosing his money.
This is why our leaders struggle so hard not to let someone go broke, because everything is interconnected these days due to the deregulation in financial markets and thus there are a lot of ordinary people who will lose their money in that case – because they, or their bank, or their insurance company or their retirement fund invested it in Greek bonds or subprime debts or what ever.
Another possibility to solve the situation might be that the central banks step in and just print money to pay the debts (this is called quantitative easing e.g.). But then the savers pay again as printing money will spur inflation which in turn will devalue your savings.
A the same times interest rates will be kept very low, so that you cannot earn back these losses.
So let’s see what happens with your money if you invest 10.000 € into a german government bond at 1,5% return a year and an inflation of let’s say 3% p.a. The loss in real buying power will thus be -1,5% a year, that is your costs of saving. Yes, that’s correct, these days you might lose money instead of benefiting from saving.
What will be the buying power of the 10.000 € after some years?
The “bad scenario” describes the situation from above. The “good scenario” is what you learned at school, positive real returns (here +3% p.a.)
|real buying power of savings after x years|
|yrs||bad scenario||good scenario|
This is a pretty bleak picture, isn’t it?
But this scenario is quite likey actually, as it is a smart possibility for governments to get rid of debts without big bangs, higher taxes and so on.
So what can you do?
You can invest your money in real, tangible values.
That is, avoid any investment that is related to lending money to someone, but “buy” tangible things instead. This might be stocks, housing, gold, farmland or durable goods.
However, be carefull:
All these investments have traps of their own and the difficult thing with them is to understand whether you are buying at a good or a bad price. So this realy needs some thought of your own.
If you go the easy way and put your money on a savings account or hand it over to someone else to invest it for you, then chances are high that you end up financing someone elses debt.
And that might not be a very lucrative thing to do these days.