Why Saving Cash Will Make You PoorsteemCreated with Sketch.

in #money6 years ago

Remember when your grandparents would always tell you to save your money as much as you could? If you would have listened to them and put cash in the bank and left it there to sit, you would have actually lost purchasing power.

Since 1913, the United States has had it's currency, the dollar, under the control of a private central bank called the Federal Reserve. The Federal Reserve came into power due to the Federal Reserve Act of 1913, with the purpose of creating a more "stable" currency.

Unfortunately, since the establishment of the federal reserve, the US Dollar has been anything but stable. 

In 1929, the banks engineered the most detrimental financial crisis and stock market crash that America had ever seen. The Dow Jones plummeted an incredible 89% in a matter of 2 years. During the same time period, the economy entered into what we know as "The Great Depression." People had lost their life savings to the stock market crash, and their jobs to the depression. This is an example of how severe inflation in assets can cause severe deflation.

In 1971, Nixon took the dollar off of the gold standard, stripping it of the last of it's integrity. The Federal Reserve could now create money at will with no restrictions. This has resulted in a non stop devaluation of the money we use every day, and it won't stop. While the "world reserve" currency continues to weaken, holders of the dollar continue to suffer from it through the loss of purchasing power.

Today, our banking system operates on something called fractional reserve lending. This essentially means that banks don't have to keep the money that you deposit. Some banks only keep 1% of the money that you give them to hold in an account. Banks will lend sometimes nearly 99% of their deposits. And if they run out of depositor money to loan out, the federal reserve will just create money out of thin air. 

Source

The federal reserve is in charge of setting the fed fund rate. This rate is the amount of interest charged to private banks. The interest rate that a consumer pays on, say a credit card, is the fund rate plus whatever the bank needs to charge in order to make a profit. The Fed brought interest rates down near zero in 2009 and kept them there for over 6 years. Both of which have never been done before. The result of this is a mass amount of currency created stored up in the system waiting to be spent.

A long history of devaluation and distortion accompanied with irresponsibility on the part of the Federal Reserve in recent years is a recipe for some very unstable times to come for the US Dollar. But, most people won't recognize dollar instability, but instead see everything becoming more expensive (in terms of dollars) and asset prices fluctuating. 

Inflation used to pace at about 3% per year, but thanks to our good friend Helicopter Ben, it's possible that we see our money inflate at an ever continuing pace into the future.

Don't focus your energy on increasing the size of your bank account. Instead, focus on accumulating assets over time that will protect your purchasing power and even bring you ahead with a gain.

For an income investment, think about physical real estate, REITs (Real estate investment trusts) or dividend stocks. To simply protect your purchasing power, consider precious metals. If you're focused on beating the stock market and growing the size of your portfolio, consider growth stocks and possibly trading the market (if you have the right temperament).

Disclaimer: I am not a financial advisor. The articles that I write are for educational purposes only. Do your own research and hold yourself accountable for the investments that you choose to make.

Thanks for Reading!

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