One of the unintended consequences of this housing market is the punishment conservative savers are taking. Last month we had the rather astonishing release of data from the Bureau of Labor and Statistics telling us for the month, that inflation was at 0 percent. As disconnected as this is from reality, there is a reason the Federal Reserve is chopping rates even further and it is the opposite of what they are telling you. Behind closed doors, they are hoping that you go out and spend and go into further debt. In fact, they are setting up a system where savers are actually punished for not spending. This game and charade of course can only go on for so long. First, let us take a look at the current inflation rate and adjust it to an annual basis:

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The first thing I want to point out is the CPI. You’ll notice that last month, the reported inflation rate was 0 percent even though oil touched about $110 a barrel and has remained at those levels for sometime. Let us first calculate the current annual inflation rate based on the above numbers:

If we add up the previous five months of data, we get 2. Since this is five months of data we’ll have to adjust this for a 12 month calendar:

(2/5)=(x/12) gives us X as being 4.8 percent

So currently the annual inflation rate is at 4.8 percent. You will also notice that we have lost jobs in the previous three months to the tune of 76,000, 76,000, and 80,000. Keep in mind that during the previous three recessions, job losses during peak times reached over 300,000 a month even during the minor recession earlier in the decade. This can be looked at a couple of ways. Much of the data from the BLS lags the actual market. That is why people were predicting a recession in the middle of 2007 even while jobs were still being added. Keep in mind the way these things are calculated they leave out much of what the majority of Americans are facing on a daily basis. For one, the CPI does not calculate mortgage payments and taxes but owners equivalent of rent which understates the current burden of housing prices on many homeowners. Also, energy is blunted in the data so the rise in fuel cost isn’t reflected either. Then, you also get complicated uses of hedonics for healthcare, food, and education which again understate the true nature of consumer inflation.

So with that said, for someone to simply preserve their wealth in the current market they will need to achieve a return of 4.8 percent after taxes. Keep in mind that interest earned in CDs, savings, or money market accounts is taxed so a par rate of return is still not keeping up. But let us take a look of a few major institutions to show you how any saver in the current market is being punished:

The first one we’ll look at is Emigrant Direct. They have offered very competitive rates on their savings accounts and currently they are offering a 2.75% rate of return. You may think this is low but as we’ll show further, this is actually competitive for savings in the current market. The next place we’ll look at is ING Direct:

The current Orange Savings Account from ING is offering a rate of 3%. You notice that their CD offers a higher rate of return but let us look at what is required of this:

In order to achieve a yield of over 3%, you will need to deposit at least $50,000 or more. This isn’t even calculating the after tax amount you’ll be getting. We are simply looking at the current rates going for safe investments. When I say safe investments, I mean accounts that are protected by the FDIC which insurers individual accounts up to $100,000. The next place is your typical brick and mortar place that is also offering an online product like Emigrant Direct and ING. Washington Mutual is offering an online savings rate of 3.25% so long as you have a checking account with them:

You’re probably starting to notice a pattern here. The savings rate for many of these places hovers from 2.75% to 3.25%. Let us look at a different kind of account with Bank of American and their Money Market Savings Account:

Here, you’ll notice that the rates up to $10,000 will only yield you .35 percent. You will need $10,000 or more to get a rate above 1.24%. Bottom line is that if you stick your money into these accounts and let it sit, your money is actually eroding simply because the rate of inflation will eat it away. And this isn’t to say anything about a dollar that is also going down as well:

During the past two years, the US Dollar Index has decline by 21.7 percent. Given that many of the items Americans consume are imported, that means your purchasing power has declined by an incredible pace. If you have any doubts about this just take a trip to Europe or anywhere in the world for that matter.

There may not be a direct correlation from the Federal Funds Rates and the actual payments you make on mortgages simply because market risk is so high at the moment. But the funds rate does have a direct impact on the above savings rate on conservative accounts. What the Fed is telling you is that if you plan on saving your money in guaranteed accounts, you will in fact be losing money. Then you may be saying, what about playing the stock market. Let us look at the performance of the three major indexes:

Looking at these three even after the recent rallies and major intervention actions by the Federal Reserve they are still down on a year to date basis by:

DOW: -4.94%

S&P 500: -6.67%

NASDAQ: -10.60%

Clearly, the market is making it more difficult for people to protect their wealth. The places that have done well are in foreign currencies and commodities. Why are these doing well? Because they are simply reflecting the true devaluation of the dollar and the real rate of inflation that most Americans are feeling. Let us look at a few currencies:

The Japanese Yen is up 9.91% for the year against the dollar. This has a lot to do with the carry trade unwinding and also the extremely low central bank rates over in Japan. If you think we have low rates here, you just need to take a look over there. But there is more to this than just easy rates. In fact, the Euro is holding up strongly as well too because the ECB has held steady with their rates:

The Euro is up 7.68% for the year against the dollar. Now given that Europe may also be facing a credit bubble as big as our own by the reflection of recent writedowns on mortgage backed debt, their currency is perceived at least by foreign exchange markets as more valuable than the dollar.

The irony is that most Americans do not even have a tiny amount of money in commodities or foreign currencies to hedge their bets. Given that we are in a recession short of the technical definition, if the Fed cuts rates again expect the yield on the already inflation lagging savings accounts to go down even further and expect foreign currencies to go up and also, commodities. In this market, it is important simply to preserve wealth as many that are now seeing their equity evaporate in their homes are realizing. Even the stimulus checks that are coming out next month are not touted as savings checks but a way for you to spend even further. If anything, take those rebate checks and put them in a savings account or foreign currency. The Fed wants you to spend and be in debt since that is the last straw of our economy. Yet this is not good for you on a personal level. No wonder why Americans now have a negative savings rate. Conventional buy and hold investing styles are going to be proven extremely wrong in 2008 and if you want any more proof, just look at these scary charts. Be wise and don’t follow the advice of the Fed.

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There is a shocking statistics that 1 out of every 5 American households has a net worth of zero. Think about that for a second. The world’s most prosperous nation and 20 percent of households do not have a penny to their name when liabilities are subtracted from assets. The median net worth for families in the U.S. is approximately $90,000. This was taken before the recent housing downturn where many Americans store their wealth. It is important to plan for retirement if one has not done so. The younger you are, the more likely you are that Social Security will not be there for you. If you are already nearing retirement and have very little saved up, it is time to step it up.

Retirement accounts such as 401(k)s are an absolute must in planning for your future. There is a classic book, The Richest Man in Babylon by George Clason that really captures the essence of what it takes to become financially secure. The theme is that you must pay yourself before you pay anyone else. It is a simple yet profound message. The majority of Americans nearing retirement do not have adequate funds to support them through their non-working years. Social Security for many will only provide a modest sum of support. The average Social Security check is $1,002 per month. Try living on that in many metro areas across the U.S. Take a look at a report by the Federal Reserve in 2006 regarding a 2004 survey:

What you’ll notice for 2004, is the vast divide between the median net worth of $93,100 and the average of $448,200. Even at the peak savings age, 55-64 you’ll notice that the median net worth is $248,700. Given that many Americans will live into their late 70s and early 80s, $250,000 won’t go far over 15 to 20 years. So people need to plan for their retirement.

401(k) plans are employee sponsored retirement accounts. The benefit is that you pay into the account a portion of your wage and it is tax deferred. The major perk of deferring income taxes is that you allow a more sizable portion of money to grow and compound over the years. This is the ultimate paying yourself first strategy. Next, many employers will match your contributions to a certain percentage and this is similar to receiving free money.

Most 401(k) plans will give you an option to invest in a variety of mutual funds, bonds, and other stock plans. Some funds are target specific and diversified making investing very easy. For example a 2040 plan will invest with an allocation that has you gearing up for retirement in 2040. As you near the date, the portfolio will rebalance into a more conservative holding since you may not have that many more years to ride out the bumps of the fluctuating market. You also get the perk of dollar cost averaging. Once you set a specified amount, let us assume 10 percent of your income, it will automatically be deducted from your wages, placed into the account and invested. This helps since you mentally adjust to not seeing the money and it also forces you to save. With a negative national savings rate, it is important to pay yourself first.

So how long will it take you to become a millionaire? Let us run a few different scenarios:

Starting Balance: $1,000

Saving $300 per month at 11 percent: 31 years

Saving $500 per month at 11 percent: 26 years

Saving $700 per month at 11 percent: 24 years

The point is, the early you start the better. The 11 percent is based on historical market returns over the past. Keep in mind that a 401(k) should only be one tool in your retirement planning. I will go into other investment ideas such as currencies, commodities, inflation protected savings bonds, and real estate that should also be a part of your overall financial profile in other articles.

If you haven’t started a 401(k) or a 403(b) the public sector equivalent of a 401(k), there is no reason not to open a Roth IRA or Traditional IRA. With a Roth IRA, your capital gains will not be taxed once you reach retirement age. With a Traditional IRA, you are able to write off the portion of your contributions on your tax returns while paying capital gains once you start taking money out. The reason you should max out your 401(k) and 403(b) first is that money is tax deferred. The money you put into a Roth IRA and Traditional IRA has already been taxed thus lowering your overall return.

The major point is that if you haven’t started, get going now and start planning for your future. Make sure to pay yourself first!

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