Is it Rational to Save?

June 02, 2017

Is there a better way to save for the future?

It’s one of those things you know you’re supposed to do, yet according to a recent report from Bankrate, nearly 6 out of 10 Americans don’t even have $500 in savings to their name!

And, over time, the prices of goods tend to increase. Prices of many critically important goods are rising much faster than the official bean counters will admit. After all, if the CPI was calculated to truly reflect the actual price of inflation, they would owe social security recipients a major cost of living adjustment. The trust fund is on the verge of bankruptcy as it is!

Many Americans ARE saving, though. What about the 40% of Americans who DO save? Are they making rational decisions about their financial future – AND present? The truth is, if they are saving only in cash, they are not maximizing their potential returns. It is like trying to fill a bucket with holes in the bottom. Many experts believe they should diversify their portfolio.

Let’s look at the math:

Sure, everyone needs a highly liquid rainy day fund to cover 3 months of expenses in the event of a financial setback. Beyond that, $1 today buys less than it did 10 or 20 years ago. Let’s look at the real life implications of that over a long term basis.

Of course the past doesn’t guarantee future performance (or lack thereof) but it can sometimes be an interesting factor to consider.

Just 20 years ago an average midsize car cost $16,900, an average house cost $124,100 and average income was $37,000.

Year Car House Income
1997 $16,900 $124,100 $37,000
2017 $25,000 $317,400 $50,000
Change 47.90% 155.80% 35%

That means cumulatively, cars have gone up 47.9%, homes have gone up 155%. Incomes have gone up at only 35%.

Today, those numbers are roughly $25,000, $317,400, and $50,000 respectively.

Can you imagine what you would have had to save in 20 year old dollars to retire and survive today? To put it another way, what would you have given up in consumption then and what purchasing power would those dollars retain today?

Let’s put this in perspective and project these numbers forward.

No one has a crystal ball, of course, but if price and wage increases just remain constant, in 20 years an average car would be $48, 750, a home would be $808,350 and median income would be $67,500.

If we continue on our current path, here's what a car, a home and your income COULD look like in 2037 based on the past 20 year performance.

Year Car House Income
1997 $16,900 $124,100 $37,000
2017 $25,000 $317,400 $50,000
Change 47.90% 155.80% 35%
2037 $48,750 $808,350 $67,500

With wages clearly not keeping pace with the prices of all the things we buy, the future looks increasingly difficult.  How can you possibly save enough of today's dollars to pay for tomorrow's inflation?  Honestly, you can't.Maybe you should consider saving in other investment assets.

HOWEVER, there is good news.  By diversifying your savings and retirement portfolio, many experts believe you can make up the difference and then some.  Precious metals retain their purchasing power remarkably well over time.  There is 8,000 years of recorded history showing this.  Though its value fluctuates, gold has NEVER been worth zero.

Going back to 1997, if you had saved in gold instead of dollars, you would have increased your purchasing power instead of a decrease for those that saved in ONLY dollars.

Consider if you had saved gold in 1997

Year Car House Income Gold
1997 $16,900 $124,100 $37,000 $287
2017 $25,000 $317,400 $50,000 $1,260
Change 47.90% 155.80% 35% 339%
2037 $48,750 $808,350 $67,500 $5,531

In 1997, it would have taken you 59 ounces of gold at $287 an ounce to buy a $16,900 car.  If you had instead saved up 59 ounces of gold, you would have something like $74,000 worth of gold today!  The same calculations for a new house (432 ounces of gold for a $124,000 house in 1997) give you nearly $550,000 today!

If you think of it in these terms, the future doesn't seem so hopeless and uncertain.  You only need to use history as your guide and start to diversify your retirement.  Billionaires and big banks have started buying large quantities of silver and gold in early 2017.  What do they know that you don't?

Clearly, saving only in cash leaves you vulnerable to possibly losing purchasing power over the long-term due to inflation.  Investing in stocks comes with some risk of volatility and big dips when recessions happen.  But with gold in your portfolio, you have a fighting chance of retaining the purchasing power for which you have worked so hard.  Only by being proactive and anticipating market trends over 5, 10 and 20 year windows will you achieve your retirement goals.

Find out how Gold can bolster your portfolio!

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