Recent market activity has driven the yields on German bonds below zero, indicating that the German Government could borrow for 30 years at an interest rate of less than zero.
The inverted yield curve in the U.S. has left already-nervous investors with more jitters. No panicking over financial jargon. The inverted yield curve just means longer-term borrowings come at a lower cost, which would be opposite under normal circumstances.
In plain English, there is a lot of money floating around worldwide — probably too much money.
So, how cheap is our money? The question is intentionally meant to mean both “How much we are paying for borrowing?” and “How much we are earning on our money?” In either case, the answer is low, quite low. So our hard-earned money is not really working hard for us sitting at the bank.
Some may take comfort in the fact that inflation is low as well. Inflation is generally measured by the consumer price index (CPI) which literally serves as the barometer for things revolving around consumption. Even though apple and pork prices have increased dramatically over the past couple of months in China, history has shown that agricultural produce has a way of adjusting prices back to normal by the basic law of supply and demand.
But we live a much larger life than consumption. Take property prices for instance. As the largest expense for every household, it is only marginally reflected in the CPI, mainly through the cost of renting. Moreover, raising a child is insanely expensive, especially in big cities. The tutoring fees, from homework to dancing and sports, can really cost us an arm and a leg. That is hardly shown in the CPI either.
So who is helping us with all these costs? I mean, aside from us, with our workplace compensation, and our lazy cash friend at the bank.
Here comes an examination of our personal wealth. If we are fortunate to own a property, do not get complacent. The rise in property prices does not mean much, except that we can borrow more money on it. We may be inclined to feel wealthier, but that is close to an illusion.
Our car is a total liability. Aside from insurance and gas expenses, sharp depreciation takes most of its worth away before we know it. We may have some collectibles, which may or may not add value over time.
The rent we, if privileged enough, get from additional properties and/or the profit we make from flipping those properties can be a big help to our wealth. Our investments in stocks and/or mutual funds can generate additional money, only if we do it right.
Make no mistake; I am in no way encouraging readers to take on additional risks. In fact, risky assets are risky for good reason. Many investors do not have the necessary financial and mental requisites to survive in the stock market.
The cruel fact is that taking no risks is probably the biggest risk for most. A dollar is a dollar. Salaries from industrious work do not make them more valuable than easy money. The abundant liquidity just makes our money prone to dilution. Looking around at people with a similar income, we will find the differences between their financial wellbeing lie in the way they have managed their wealth.
Rome is not built in one day. Do your homework, talk to people with more experience, seek professionals for advice, and prepare for long-term wealth management steps.
“Two roads diverged in a yellow wood ... I took the one less traveled by, and that had made all the difference.” If Robert Frost were our financial adviser, he would certainly suggest us to take the road with more financial sophistication.
Earning the money is only half the way, and managing our wealth is the more important yet often neglected part. It doesn’t hurt to take a hard look at our hard-earned money.
(The author is an independent financial investor and freelance writer.)