Thinking about money, savings and investing

Thinking about money, savings and investing 

As I start this post, I have to confess that I don't have a final conclusion in mind. I don't have a final paragraph for this article formulated in my head as I type this.....in fact, I am writing it so I can think through some thoughts I have tossed around in my head all my life. (I am an Engineer, so working on problems is what I do, and looking at and aligning data and characterizing a situation is a very big part of sizing up and understanding a problem.....and then formulating a solution)

So what is the problem.....well, as an older human, and a saver at that, how do I move forward with both my income and savings to insure I can live the sort of life I want into the future. In short, what do I do with my savings and future income potential. (now going down). 

This would of course be so much clearer if I knew the future.....and by that I mean how economic conditions will shake out. What will inflation be, what will taxation conditions be....what will my own needs be. Without a crystal ball, this all becomes something that most people just don't really think about.....but IMHO, they should because no one us in a better situation to understand your needs than the person between your ears.....YOU!

Ok.....so let's just focus on one thing.....savings...that is, how does one park any deferred consumption / accumulated wealth so that it will be available for you, and not stripped away by others. (and others include not only robbers or unscrupulous individuals, but our own governments who now have more debt amassed than ever before....and will have to pay that debt, even if just by simply "inflating" it away...and that might be the hardest thing to protect against.)

First, a definition of savings:

"Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs."

Let me me expand the definition to include the parking of value into investments of any and all kinds for the sole purpose of maintaining value such that it might be converted now or in the future to an income that one can spend. 

If money were energy, I would think of savings as "potential energy" and income and spending as kinetic energy. (WORK can therefore be stored in SAVINGS which can then be later recovered into WORK for you)

So, we need to consider the parasitic losses of SAVING as we save.....things like inflation, taxes, storage fees and any other losses that "eat away" at those savings and provide you no value. This makes for a very tricky environment because there isn't a single place one can easily think of that offers a place to park one's "deferred consumption" (savings) that offers zero risk. (and don't forget those DEBTs I referenced above.....those can only be paid by taking from current productivity or savings......a better way to think of that statement is that people without productive skill or savings can not be donors to the cause......i.e. the old blood from a stone problem)

So how does one "store" savings in a form that does not lose value.....this is the $64,000 question, and the answer might be considered if I follow my comparing money to energy, and savings to POTENTIAL ENERGY. We might want to consider the laws of Thermodynamics.

The initial law that comes to mind is perhaps the one that I like to summarize as "ENTROPY RULES". Let to it's own devices, energy will naturally migrate to it's lowest form....heat. I guess things like government debt are a sort of "negative potential energy".....they are akin to being able to make WORK with a promise of payment back. The difference between those sort of promises from governments vs those from private sources is a matter of "risk"....as well as buy-in. That is, when I take my savings and buy a company bond, the company will go off and use they money to make something happen....and they promise to pay me. Something might very well happen that results in their default to that obligation, and I am well aware of that the moment I hand them the money. In fact, they pay me an interest rate that is very closely proportional to the risk taken in loaning them that money.

But with government debt, we come to think of it as having NO risk. We believe that sovereign debt to be risk-free. But worst than that, you could argue that those BUYING that debut are aware of the risk of non-payment, but that is really not true. In fact, we citizens not only have very little say in the DEBT spending our governments do on our behalf, but many of our "secure" assets are in fact secured by the holding of what is considered to be default-free assets.....those very same government bond obligations.

Does that mean they are in fact ZERO risk.....not really.....you can ask holders of Puerto Rico bonds that....or those who held the debt of Venezuela....there you see cases loss by default and having value inflated away. (It didn't really matter whether the sovereign has the ability to "print money" or not.....holders of debt of either of those two have lost)

So besides the risk of fire, what would be wrong with just stuffing your mattress with greenbacks.....well, other than that greenback is really akin to that government bond above....actually, just an obligation for nothing but that green paper it is, but backed by nothing really. 

OK.....so what are we "trying" to do? I would suggest that we have been saving, and at the very least, we want to find a "store of value", and maybe even "put our savings to work" to grow it. (at least in order to maintain the value we originally stored)

So what will be "needed" or "productive' in the future.......that is the question that I believe to be important. Why, because if you and your savings are supplying some value, it will a lot less likely that society will work to strip it away from you. (what you have or are doing is valued/needed)

Not knowing the future leads me to think that diversification needs to be on top of your mind. By that, I don't just mean spreading across different company stocks or asset classes.....even wider. Consider different assets, different productive resources. Not knowing what will be valued or needed, you might NOT want to concentrate on one or even a small area....if you were right, you would be golden.....but if you are wrong, you might as well have been the person working at Enron who held all their savings in savings in Enron stock!

From all that, it seems to me that idea of future "need" and "productive resources" are key.....but just as important is future "cash flow".....by that I mean that the asset or capacity you put your savings in needs to consider and be able to cover the operational costs needed to keep it's existence / operation viable. Depending on the situation between now and when ever "then" is, it is not clear how good or bad it will be to have debt.....it might be wonderful if it is fixed rate and we suffer a sort of inflation, or it could be horrible if we suffer a deflation. 

Saying that, it seems that considering a "middle road" or at the very least a position where you have fair amounts of liquidity would be important so you can move from one side of the boat to the other should conditions require it. (so, we might need to be flexible......)  

So for now, diversification.....then as we move along and things get clearer, flexibility and an eye toward a more optimal and proactive re-balancing.

OK, so what will win.....GOLD, REAL ESTATE, BITCOIN, opening a BUSINESS....my first thought is that keeping your own skills and knowledge might be the first best thing. If your skills are in demand, they will be paid for. As for the other stores of value listed above.....they will each have some value over time, but how much is the question. It might be wise to hold a little of each. (Though I personally worry about the frothy nature of Bitcoin at the moment)

The value of your asset selection might be the key.....and knowing the value it has. (with land, it might be timber value.....rental value.....value for building housing....etc)

Sorry....no answers to be found here......maybe just common sense that you have already considered, or perhaps a few nuggets of perspective that might help you in your journey. Keeping the idea of "productive resources" is probably central to it all!