Savvy frugal types are all about lessening the risk to their savings through diversification. Well? How heavily invested are you in paper with dead presidents on it?
That's right, those greenbacks in your wallet are an investment. You purchased them with your sweat equity, when you worked to create value for someone else instead of doing something else more enjoyable. But your employer didn't give you anything of real value - he gave you dollars.
"What? Of course dollars are valuable!" you say. Oh really? How nutritious are they? How sturdy will clothing made from them be? In and of themselves, dollars are kindling and toilet paper. (In electronic form, which is where most of our dollars exist these days, they don't even have that much value!)
Furthermore, you don't even own that paper (or bank byte balance)! Read what it says: "Federal Reserve Note." It is the Federal Reserve who owns this currency and it is the Federal Reserve that controls it.
The Fed, as it's commonly called, didn't even exist until 1913. It's not even a government institution; it's run by banks. But the green paper issued by this banking interest are what we've all come to understand as a measure of wealth for generations now.
"So? If we've been able to trust in bucks for generations now, what's the problem?" Well, suppose you received one of those notes when they first came out 'way back in 1913, and you stuck it in your mattress and forgot about it until now. While the paper probably still looks great, the real wealth that a dollar can buy now is worth less than two percent of what it could have bought 99 years ago.
Remember, the Federal Reserve owns the U.S. currency and they can make more of it whenever they want. And they have. So, now your bit of their currency which you're holding isn't worth as much in buying power as it used to be. More bad news: Lately, the Fed has been making more money out of thin air even faster than usual.
Get it? Dollars are an investment, and not a very good one. To keep and hold wealth, you need to diversify out of dollars and into something that holds value.
"Like the stock market?" Well, say you bought a stock a decade ago and now it's worth twelve percent more. While it seems like you made money, and you did, you didn't make any real wealth, again because the purchasing power of the dollar went down 12% in the last decade alone. Oops. A stock is a piece of paper, valued in dollars, which are more paper. Worse, you still get to pay taxes on the "gain," which isn't adjusted for inflation, so you lose.
Bottom line: Paper isn't wealth. It's an investment. Those kinds of investments include futures, bonds, derivatives, etc. Some investments pay off and allow you to convert them into real wealth, and some don't.
You only gain when you actually realize wealth. So, what is wealth? It's anything that benefits you. Like food. Or a car. Healthcare. The ability to stay home with the kids when they're growing up. The vacation of a lifetime. A house.
"'A house?' Have you looked at real estate prices lately? That's not wealth!" Keeping the rain off of you and your stuff is indeed wealth. If you think of your house as an investment, and want it to increase your purchasing power, then I agree it's been a lousy investment. As far as the benefit it's been to you, though, that hasn't changed.
Of course, delayed gratification is key to the frugal mindset, so some form of savings and investment is really important. Just make sure that not too much of that investment is in money, because money is looking like it could start losing value more rapidly soon. Look into converting some of that falling money into real, tangible things that are likely to hold value.
One such way to invest is in yourself. More on that in the next column.
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Elise Cooke is the author of the national award-winning "The Miserly Mind, 12 1/2 Secrets of the Freakishly Frugal."
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