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An Idea for Cash: Get Outta Town?

No matter how well you have most of your money working for you, you should always have some money sitting around for day-to-day expenses.  Not only that, but you really should have an emergency fund that holds at least three months (preferably six) of living expenses in case of, well, and emergency,   Job security isn’t what it used to be.  In fact, for many of us, job security isn’t.

 

But the question is, what do we do with that cash?  Should we just leave it sitting in a chequing account in a currency run by a government severely below the curve in budget and trade deficits collecting next to no or no interest?

Well, we could, and since we’re not talking about our entire nest egg, (hopefully) it’s not that big of a deal if we do.  However, I have a low-risk, low-reward idea that will add a few percentage points of return onto the money you have just sitting around.

Remember that the main factor in inflation by the creation of money.  If country A produces money faster than country B, then one unit of currency A will generally go down in value relative to currency B.  There are other factors of course, but this is the biggest.

Why don’t we want to be in USD?  Because while almost every country in the world runs a budget deficit, the US runs the largest deficit in the world on an absolute (number of dollars) basis, and is always right near the top when it comes to deficit per capita.  Which means they’re printing up money (causing inflation to shrink the value of their debt) at a faster rate than pretty much anyone else to make up for the shortfall.  Which also means that there are very few currencies that don’t increase against the dollar.

Let’s take the value of the USD vs another troubled currency, the Euro.  It’s no secret that the Euro has seen it’s share of difficulty lately.  Greece has defaulted, Ireland is on the verge of doing so, Spain and Italy are having to make drastic cuts in their standards of living.  But from 9/11 when America single-handedly financed two wars simultaneously, to 2008, when the “Euro Crisis” first came into the public eye, it was a march straight up for the Euro.  And even since then the Euro, one of the worlds most troubled currencies, is managing to keep it’s ground against the dollar.

Now what happens if we look at a currency that’s very stable?  Like the Swiss Franc? Observe.  Planes hit buildings, America goes to war again.  (and again, and again, it seems), and the CHF (franc) takes off.  In fact, the value of the franc has very nearly doubled since that fateful day.

Canada’s has done almost as well.  Australia has more than doubled.  Starting to see a pattern here?  It’s not everyone else that’s going up.  These countries all run deficits as well.  It’s America’s currency that’s going down.

In fact, the problem covers a lot more than the cash sitting in your bank account.  But that’s a start for now.

 

But if you go to the bank and open a foreign currency account, you may not be able to open an account in the currency you want, and you’ll definitely take a big hit (often more than 2%) on exchanging your money from one currency to another.

One solution you can use is to invest your money into a foreign currency ETF or open a forex trading account.  I’m not suggesting you get into active forex trading, as 90% of the people that get into that game come out losers.  But you can get an account, shift your savings over to it, and put it into a different currency far cheaper than you could at your local bank.   Using an ETF exposes you to a management fee (or MER), but you can  move your money there much more easily than opening a forex account.

Also, you can expose yourself to short-term bonds from other governments.  While the Canadian and Australian economies are on pretty much the same track (straight up, because they rely on natural resources that have to be harvested locally rather than industries whose labor can be outsourced), the US and Canadian gov’t short term bonds pay less than a percent, while Australia’s pays upwards of 4%.  Try getting that in a Citibank savings account.

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