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Do The Bottom 80% Even Have A Chance?

3 August 2009 No Comment

Financially, most Americans are in terrible shape.  For years, they relied on their increasing home value to be their “savings” vehicle.  That strategy, of course didn’t work.  With high mortgage payments, a lack of savings, job insecurity, where do the bottom 80% turn?  Where does prosperity or even financial comfort come from?

The politicians will tell you that it’s not your fault.  The system failed you.  You got screwed by a banker.  Well, it is your fault.  Nobody is responsible for your money and actions but you.  The point in making this clear is that the future is also up to you.  Don’t rely on the politicians promises to jump start this economy back to prosperity like its a car needing a jolt.  The economy is not a car.

The Frugal Lifestyle

The clear path to take is to embrace frugality.  The last few years (arguably the last 20 years) have seen a huge increase in standard of living funded through debt.  The debt bubble has popped and we’re left with hefty bills to pay.  The only way out of this hole is to simply stop spending so much money.  This definitely requires an adjustment but its a good one to make.

Risk #1: You are responsible with your money and forego purchases such as a jetski or a Caribbean vacation in the name of frugality.  Your neighbor who was not disciplined and has been living it up for a few years might get “bailed out” by government programs ultimately funded by you.

Risk #2: Inflation could potentially hurt your finances by eating away at your hard earned savings.

The Smart, Frugal Gameplan

It is important to be responsible with your money and save it instead of spending it all.  The government will throw every incentive they can think of at you to try and get you to open up your wallet for a new car or a bigger house.  Forget about it.  Instead, keep socking away money as fast as you can.

While there isn’t much we can do to protect against risk #1 (isn’t it sad that we feel helpless and have no say in our government’s actions?), there is plenty we can do to position ourselves to survive any serious level of inflation.

By investing in real assets that will rise in an inflationary environment, we can protect our assets.  Unfortunately, cash is not an inflation-protected asset.

Real estate can potentially do well in an inflationary environment, but it also costs a good deal of money to maintain.  You’re better off viewing real estate as your residence, not your inflation hedging investment.

Stocks over time usually will offer some level of protection since you basically own a company.  Companies typically will pass on costs to the consumer and can still make money during inflation.  If your favorite company gets hurt big time by rising fuel costs such as an airline or shipping company, then an inflationary environment could potentially hurt profitability.

One of the best ways to protect against inflation is to buy commodities, specifically precious metals.  Gold offers a great investment for inflationary times.  If you’re not interested in owning physical gold, check out the Gold ETF (GLD).  Also, gold mining stocks will do very well in an environment where the price of gold is moving higher.  See the Gold Miners ETF (GDX).

Other Considerations

I recommend considering other components to your overall financial game plan.  Your career, secondary income streams, real estate, investing & trading… these are all ways for you to beat the game of wealth.  To become wealthy, the growth rate of your money needs to outrun the growth of your expenses and inflation.  All of the components I mention can help you increase your growth rate of your money.  Being frugal and protecting against inflation offer the final pieces to the puzzle.

I will be writing extensively in the future on my own progress in the areas I mentioned, specifically the creation of income streams and my investing experience.

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