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Financial Stability, are we REALLY marching towards it ?

Neither my grandmother nor any of my friend's grandmother worked, but my mother and some of my friend's mother worked and now my wife and all of my friends and their wife work, by work I mean contributing to the labour force by paying tax. In US, according to the census bureau, the Number of female workers that participated in labor force(paying taxes) in 1970 was around 40% and today it is around 57% and increase of over 42%. During the same period the stats shows a different picture for men which is 75% and 70 respectively a small decrease in percentage (, look under the job section of this link

Today, according to the census bureau, women earn around 0.77 cents for every 1.00 dollar a man earns.

Time has changed, things tend to change and so do people's attitude, the point here is not to discuss what is correct and what is wrong, it is about the real purpose behind the working of both people from the same family. The first motive behind this attitude is to achieve 'Financial Stability', in the process we might forego a lot of compromises, which has to be dealt in a separate discussion(and not within the scope of this discussion). When a family earns 1.77 cents in place of $1.00, obviously they are contributing to the rise of inflation by spending more for multiple reasons(if they have kids, they need to be put in school, generally tend to eat out a lot, buy more dresses to work, need to have two cars, need to pump in more fuel etc.,). This has been one of the main causes contributing to a 'higher and rapid' Inflation rise. To counter inflation and to have a decent social life two people working from the same family is no more a luxury, it is more of a mandatory requirement, increasing the percentage of people contributing to higher inflation. A perfect catch 22 situation. This situation is going to remain for a foreseeable future in time. Even though I personally like to, I am not here to say that only one person(could be male or female) from a family has to work(people will either call it socialistic or male chauvinistic thought). For all the hard-work put in as a family, the idea behind this piece of writing is to help people TRULY achieve this dream of 'Financial Stability'.

Government numbers officially say that the inflation rate based on the CPI(Consumer Price Index) is 3% annually. People who have published these numbers are educated and are very knowledgeable but still I am at loss in understanding this number (candidly admit my ignorance). For instance gas price in '98 costed around $0.75 per gallon, today it costs around $3.15 for the same. In the same period, milk used to cost around $1.25-$1.5 per gallon, today it costs around $3.25 for the same, median property prices have been rising at 7% per annum(on an average), the income level the same way, the spending level the same way. Going by the govt numbers of the inflation, prices should double in 24 years(by compounding 3% per annum) but most of the commodities that I can think of has more than doubled in less than 10 years ! Still, let me not dispute those numbers because I whole heartedly agree that they see the whole picture, which obviously is not available to me.

Going by the official inflation numbers, today's money will be worth half of it in 24 years, meaning, one needs to have 'minimum' twice the amount of money what they have today to maintain the same life style at a future date. Now getting back to the question of 'Financial Stability', will we be able to achieve it in the current scenario ? Does two people working from the same family help the cause ? Will that alone take care of achieving the goal? Are we doing the right thing, Do we have a plan? Is it achievable? Let me try to suggest a few tips, that might TRULY help achieve this goal.

Hard cash invested in bank appreciates based on interest rates that we get. Let us optimistically say that banks pay 5% on average as interest, which is again taxable(you loose around 30% of the interest earnings which amounts to 1 - 1.5% of the interest in taxes) making your net gain in the range of 3.5 – 4 %(provided you get 5% consistently). This growth rate is exactly negated by the official inflation numbers!! Investing in high yielding CDs ALONE is not a good solution, even though it is considered safe. The key word to financial stability or financial freedom is DIVERSIFICATION. It is a common belief that large amount of money is needed to diversify, it is absolutely a myth. How large is large, well there is no answer to this question. Each person MUST diversify to their own capacity. Let me consider the working middle class group as my target audience and lay down my solution:

First and foremost, estimate the sum of all your monthly expenses, observe whether is it is realistic over a period of time (say six months). Hike one month's expense by say ten percent. Based on this amount, never hold hard cash in excess of what is required to run your family for four months. You are eroding your hard earned money, if you hold cash more than this. The rest of the money could be made to work better as follows:

1. Precious metals(mainly Gold): It has always been a great source of investment. Statistically it has outgrown the interest rates that banks give(based on 50 years of historical data, considering gold alone). It has disadvantages too, the main being fluctuation, metals tend to fluctuate based on supply demand and various global economic factors, still they have proven a better investment in longer run. It is a very good idea to hold 7-10% of your savings in this category(not more than that). There are various ways to invest in this: Gold Bullion(hard gold), Gold Certificates, Metal Funds, Precious Metal IRA are few of them.

2. Mutual Funds: A very excellent source for diversification. This too has its own risks but if the correct funds are chosen the benefits clearly outweigh the risks by multiple times. The amount of money invested in this depends on various factors, age certainly being one of the main factors. People should slowly reduce their holdings in mutual funds as they approach retirement(one bad year can wipe out most of the hard earned returns, which you cannot afford as you approach retirement). A person between 30-35 years of age should comfortably invest a good percent(personally I would say around 50%) of their savings into MFs. This does not include their IRA or retirement savings. A lot of free tools are available in the market which helps even an ordinary investor help choose good mutual funds.

3. ETF: Exchange Traded funds, this is a very good source of investment on 'anything anywhere'. It could be petroleum, gold, SP Index, Chinese Stock Market etc., This is slightly different from MFs. They are hybrid of Stocks and MFs(stability like MFs and price fluctuations like Stocks). Morning star has a very good ETF screener utility(they have started it new, owing its recent popularity - ). It is one of the best sources for diversification. This can be done with any stock broker.

4. Diversified Currency Funds and CDs: The last decade has been very harsh on dollar(rightly so) and looks like the trend will continue. The same could happen to any currency. A good way would be to invest in a diversified currency CD ( is one bank that provides this with FDIC insurance, however, the minimum investment here is 10K). The risks exist here too but are less compared to the first three investment options and the same with return. If the right mix of CD is chosen (can be done with little research) the returns will surely beat the ordinary CD. Alternately you could do this by investing in 'Hard Currency' mutual funds(their investment minimums' are typically lower than this option, in the range of 2.5K)

5. Last but not the least: If you are reading this article, you must be in a much better position than many other financially underprivileged people. Philanthropic activities (Charity), is surely an investment, one should try and give away at least a very small percentage of money to this cause. It is surely a diversified savings, morally, for our future generations to follow and live upon!!

Hope this article helps…….

This post first appeared on Perfect Perceptions, please read the originial post: here

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Financial Stability, are we REALLY marching towards it ?


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