Tuesday, 20 September 2011

Enough stuff! What to do with this spare money?

At some point in time, I hope that you look around you at all the stuff in your life and you think to yourself "seriously, I've got enough stuff! I don't need anything more". Maybe you don't even have enough room in your house for more stuff! Not only do you no longer need anything, but you physically can't take any more.

What a great situation!

Perhaps you should blow it all on a holiday instead of buying more stuff! Holidays don't take up a lot of space, and I'm sure you could use a rest after all this hard work you've been doing if you've got spare money that you're wondering what to do with it. But wait. Hmmm, if you spend all your money on a holiday or something like that, it's gone. That's not storing your purchasing power for when you'll need it some day in the future. That's using it up already. Better think again I guess...

So then you're thinking "OK, but I still have money that I want to save somehow or another for later use, but you're telling me that keeping it in the bank isn't without risk of loss". Well, yes and no.

As we previously discussed, because of the nature of today's money system, you are never at serious risk of losing all your savings in the bank. You may not get them all out of the bank instantly if you want to get it out during a panic, but you will eventually get all of your cash back from the bank. The Central Bank will ensure that the banks eventually have whatever amount of money is required to pay back all their depositors. Politics and the possibility for Quantitative Easing will see to it for you.

The problem is that, as we also previously discussed, the cash you get back after it has been Quantitatively Eased into existence for you will likely no longer buy what it used to. You have the same "nominal" number of Pounds, Euros, Dollars, etc — but you won't find you can buy as many things as you could before. In "real" terms (in terms of the world of real things you might wish to buy) there is a strong risk that your purchasing power will have been reduced by the time you wish to buy your stuff in the future.

So, we can see that, nominally, you are not at risk by keeping your money in the bank. But in real terms, you are at risk of lost purchasing power. The whole point of the exercise in saving was that you would put off buying stuff until later, the goal of your saving is to store purchasing power into the future, when you will wish to spend it. So, it doesn't seem very likely that you'll find a reduction in your purchasing power to be an acceptable risk, given what you know about the future of money in a world of widespread loan failures and Quantitative Easing to repair the damage.

Your question then is likely "how can I store my purchasing power, without buying masses more stuff, most of it useless to me or I would already know I want it now, and I can't possibly keep much more in my house because it's already rammed full?" You're pretty good at asking good questions aren't you? It's nice working with you.

Given that 'money' is something of ever-expanding quantity and ever-diminishing value, you are looking to avoid keeping all your savings in money. You are looking for something else that you can buy with part of your money that (1) won't go rotten, (2) there is always a willing buyer for, and (3) doesn't go down in value, depreciate, the older it gets — like, say, a car or a fridge or any other "consumer item" like that.You want something that you can rely on to retain its real purchasing power, in the face of a world where money is gradually becoming worth less and less over time. To offset the loss of purchasing power in your money savings.

Many people thought that buying houses was the best plan, and that's what pushed up house prices to unaffordable levels. Well, we can all see with hindsight that houses weren't, after all, the perfect item to purchase if you are looking to protect your purchasing power. For one thing, you can't always guarantee there will be somebody willing to buy your house from you at what you consider to be a fair price. I bet you've noticed at least one house in your area that has had a For Sale sign outside for months on end, right? For another thing, houses deteriorate and need money spent on maintaining them all the time. For another you are probably going to have to fork over a fortune in Council Tax while you own it, or if not you then your tenant will — a tenant that won't look after the house like an owner would by the way, so again you can expect some maintenance bills. Then you're going to get a nice tax bill for almost half of whatever amount of nominal money you "make" when you sell the house (unless you bought it to live in it yourself). Next we have to consider that houses are big and expensive things, and you can't just break off a chunk to sell when you need to buy something; you're going to have to sell the whole house. It may also not have escaped your attention, that lots of people don't like it when the houses they wanted to buy are too expensive for them. They need houses! By this point in time, most people have come to appreciate that houses are not the perfect investment after all. So I won't waste any more of your time here dissing houses-as-investments.

So you are looking for something from the real world, that doesn't go rotten over a long period of time, that isn't something large that you can't sell off little by little as and when you need to. This is how, in a global tradition built naturally across thousands of years of human experience, precious metals have come to fill the role of first choice stores of value. Specifically, gold. But also, to a somewhat lesser extent, silver.

If you have gold, you can chip off a little bit as and when you need to, and you will always find there is a world-wide market where there is always someone looking to buy whatever you have got. These metals never rot. One piece is interchangeable for any other of the same weight (it is 'fungible'). You can take any gold you have into a high street jewellers, or Cash Converters, or a pawnbrokers, and walk out with cash minutes later. That is why gold is the prime thing you can buy and hold with confidence, and you have been able to do so for thousands of years.

Gold is quite unlike, say, a diamond — you can't chip off a bit of diamond to sell, at least not without ruining it and making the whole lot worthless. And you can't take a diamond into any high street jewellers and walk out with cash either, because there is not a large and reliable market for diamonds. They cost you a fortune, and will last forever. But you'll discover they're not worth so much when you want to sell them and nobody's buying.

Another great thing about gold, is that it is relatively expensive by weight — so it takes up very little space in your house! In fact, the more expensive it becomes, the better it is for everybody. People who already have it, great they love it when it becomes worth more. People who are looking to store value in the future but have an already-full house, great they don't have to make a lot of space for their extra gold. People who don't have any already and aren't looking to buy any, well great whatever as far as they're concerned — it makes no difference to them either way.

I don't care who you are. I can say with confidence: gold is just the thing for you if you are looking to entrust some part of your long term savings to something other than your bank.



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