This week the Federal Reserve lowered the rate they charge banks to borrow overnight funds. This action may increase inflation and drop the value of the dollar in relation to other world currencies.
As inflation dilutes the value of your money, resulting in more money to buy less goods and services, what options do we have? In other words, where should we put our money?
Bank? with interest rates low (1-2%), and 3-4% inflation, you lose money
Stocks? Increased cost of goods and services may hurt the profits of the companies on the stock market and the reduce the value of your stock.
Treasury Bills? same as the bank
Gold, commodities, jewels-Do you store the actual objects or obtain certificates? Will there be a future market to liquidate?
Toys: cars, boats, planes, TV’s, etc. Do these depreciate in value the moment you purchase them? Are there costs to maintain, use, store, insure?
Real Estate? Probably so.
I contend that the first place for your money is your own home with a low interest rate loan (currently 5.75%-6.75%) fixed for 5-10 years. After this, you should diversify your portfolio with all of the above
Why?
a) You will pay your loan back with lower valued money. We still have historically low mortgage rates. And our government has shown us that is is sensible to pay back debt with inflated money (as governments have done to repay debts from wars)
b)Cost of goods and services will go up. Currently there is a drop in the number of homes being built. New homes will be built with higher costs. Your property value will probably go up over time compared with new homes.
c) Tax deductions of your mortage interest and property taxes will increase your net income. Renters will also be paying more for gas and groceries but without the tax advantages of home ownership.
So, there is a short window of time with the rising inflation, low interest rate scenario (since the bailout this week traded Treasury bills for non performing sub-prime mortgage backed securities, won’t interest rates need to rise to prevent a massive sell-off of treasury bills?), rather than watch prices and wait, this is the time to buy.
Rates are low, choices are extensive. It is financially beneficial to buy your first home or move up to a much more valuable one this year!
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