savings Archives - The Free Financial Advisor

There’s a lot going on in the world right now. Supply disruptions, stimulus payments, excess savings, labor shortages, and infrastructure are all playing a role in economic policy. In today’s post, I want to try and explain how they all play a factor with regard to how the FED determines policy.

Supply disruptions

Inherently, supply disruptions don’t have much to do with how the federal reserve coordinates monetary policy. The biggest supply disruption we have at the moment involves semiconductors.

The wide applicability of semiconductors makes them very important in product development and deployment. What’s more, the number of semiconductors needed just keeps growing.

The bad news is…there’s a supply shortage. That creates upward pressure on price. Not only for the semiconductors themselves but also for the products that use them.

Stimulus payments and excess savings

When Covid hit, the world shut down. People were out of work, so they didn’t spend money. People didn’t spend money, so businesses started losing revenue. In order to prevent total economic collapse, the government sent stimulus checks to qualifying individuals and boosted unemployment.

A lot of people saved this “extra” money and recently started to spend it. Jobs are starting to come back and the global economy is starting to look healthy. Confidence inspires spending. Increased consumer spending is good for the economy.

Labor shortages

Labor has become a big topic of conversation. Not only do we have more jobs available than we have people to take those jobs, but workers are quitting in large numbers. Both of those factors can have a large impact on wages.

Employers are having trouble filling roles. How can they attract applicants? Better wages and benefits? For those that can afford bigger payroll, that’s the avenue they’re using. That puts upward pressure on wages.

I also mentioned workers are quitting in droves. Employees are demanding to be fairly compensated and enough of them are banding together now. Improved benefits and increased wages are becoming more likely.

Wage inflation helps feed the price inflation narrative. The prices for products and services go up because of supply and demand factors. Wage inflation increases due to supply and demand dynamics.

These two inflationary pressures feed on each other. Wages go up so workers can afford more. Prices go up because workers can buy more, and so on.

Infrastructure

News broke about a new infrastructure bill (Source). On top of, already, record-breaking government spending, that’ll juice our GDP numbers for 2021.

I don’t have much else to say about this other than the spending involved will create inflationary pressures AND I’m proud there was bipartisan support for this bill. Not something we see very often anymore, so I’m happy it turned out this way.

The Federal Reserve

With all of that said, what’s the federal reserve going to do? If inflationary pressures are as hot as they seem, I fear the FED will have no option, but to end their accommodating stance on monetary policy.

They’ve already indicated that a rise in interest rates in Q3 or Q4 of 2023 is likely. They claim that they will let inflation run past their 2% target but by how much? At one point do they say enough is enough?

That’s a tough question to answer. I think in this situation, they’re talking bigger than what they’ll actually deliver. It’s all well and good if they say they’re going to let inflation run, but we’ll see what actually happens when that gets here.

Disclaimer

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The current dilemma I am having is whether to stash my savings for a down payment on a house or contribute to my Roth so I have cash available for buying opportunities.

I’m pinching pennies, and I’m saving money wherever I can so that cash is accessible when I need it. I just don’t know what to do with it.

Do I put it towards a down payment or set it aside for investment opportunities. Like most things in life, the answer will lie somewhere in the middle.

Down payment

I’ve mentioned in prior reflections that I’m renting right now.

I’m renting because I got divorced and exhausted all of my savings on the down payment for my house. That house is currently being rented by another family, and my ex-wife and I still own it.

That’ll help build equity into the house so we receive more if/when we decide to sell, which is good.

I’m happy with my current living arrangements. I like the place. I like the neighborhood. My commute to work is 2 minutes, and I’m close to all of my family and friends. All good things.

The only bad part is I have no outdoor space to call my own. I have no yard.

I’m trying to frame it positively by saying that I’m not spending my time on yard work, and instead, have more time to spend with my son/work on myself when he’s not here. These are both very good things.

However, I want to give my son a space to play. A place to put a jungle gym and a sandbox. A place where he can just run around and have fun.

I want to give him that because he deserves it. I want to use my savings for a down payment on a house so we can have a place to call our own.

Investment opportunities

Here’s the second part of my dilemma. I see a lot of chances to put my money to work in the market.

I’m able to play the long game because of my investment philosophy and my training. The best investors I have long-term time horizons.

What I mean to say is I can see past the present and I have an idea of what my investments can do over the long term, and the [possible] reward for investing now can’t be ignored.

That’s why I’m having a difficult time deciding what to do.

What will I do?

As a parent, you want to give your kids everything. I want to have a place we can call our own.

At the same time, I know how valuable it is to start saving and investing early so I can take advantage of compounding returns.

So here’s what I’m thinking. I’m going to develop a “savings plan”. I’ll take the dollar amount for an ideal down payment and how far in the future (in terms of years) when I’ll want to use it.

I’m thinking of $25,000 for a down payment and four years until I’ll use it. I’ll, then, divide $25k by 48 to get my monthly savings goal. Anything over that number I’ll put in my Roth.

That’ll take care of saving for a house and for retirement.

My Last Reflection:

My Experience with Life Insurance

What’s The Federal Reserve Going To Do?