While the summer temperature is soaring, the prices of consumer products are not. The last three months saw a decrease in the cost of durable goods, which suggests deflation -- a scenario where purchases cost less. In this environment, "safe money" is a smart investment.
While the summer temperature is soaring, the prices of consumer products are not. The last three months saw a decrease in the cost of durable goods. This suggests deflation, a scenario where purchases cost less.
Before getting too excited about this prospect however, think about the consequences. While cheaper may sound better, it also will apply to what is sold. For example, a homeowner’s home value could drop 25 percent or more right along with the gas at the pump -- if it hasn’t already in the current housing market.
In this scenario, a savvy investor wants cash. Then he or she can buy things less expensively and hold on to assets so as not to sell at a bargain price.
Some economists say the chance of deflation is up to 50 percent — even the federal government is now calling it a possibility. If this should happen, today’s dollar would be worth more in the future because purchases would cost less. (This is the reverse of inflation, where the present dollar is worth less in the future because prices are higher.)
While inflation is the enemy of the ultra conservative investor, who has little or no money in stocks or anything that appreciates, deflation is the foe of the aggressive investor. This is because he or she has a significant stake in the stock market, real estate investments or other asset that is relatively illiquid.
One way to prepare for the possibility of impending deflation is investing in so-called safe money -- deposit cash in a bank or credit union that offers a high-yielding , FDIC-insured savings account. The latter is important because if the financial institution goes belly up, an investor who had more than $250,000 in one account will be looking for divine intervention. (Within a family, each person can have his/her own account and be insured up to $250,000. Therefore, three individuals might have $750,000 at one bank divided between them, so no one person has more than $250,000 in any one account.)
One way to begin looking for the best rate is to check comparison website Bankrate.com and follow the steps to find the best CD and/or savings returns either locally (zip code) or nationally. Of course, money in a short-term CD will not be accessible without penalty for one or two years. The money in the savings account will.
In my Indianapolis location, Flagstar Bank had the best savings rate online. The bank also has local brick-and-mortar branches, which I find comforting. Flagstar offers a yield of 1.50 percent for a savings account, guaranteed for four months. If the stock market falls precipitously in that period, I can pull the money out for investing. If not, I’ll reassess whether I want to continue to invest in the savings account (depending on the new rate) at the end of the period or choose to invest elsewhere.
Parking cash in safe money is not a futile effort — a deposit of $250,000 would earn $3,750 in interest over a year if the rate continues at 1.50 percent. If a third is paid in taxes, about $2,475 is available to spend or reinvest.