Getting the most for your money and knowing when your money is worth the most are two different concepts. Getting the most for your money may require shopping for the best deal on retail purchases, finding the highest yields on bonds or bank certificates of deposit (CD), or skillfully and advantageously negotiating either a buy or sell agreement with a private party. (Find out whether stocking your money in these accounts will stand up to the test of time. See The Pros And Cons Of Money Market Funds.)

TUTORIAL: Introduction To Banking And Saving

Knowing when your money is worth the most implies a question of maximum purchasing power. The purchasing power of money - how much in goods or services a dollar can buy - fluctuates with changing economic conditions and foreign currency exchange rates.

Maximum Purchasing Power
Although purchasing power may be maximized in a variety of circumstances, it is most commonly seen in the following circumstances:

  • When there are favorable exchange rates between the U.S. dollar and specific foreign currencies from countries which sell goods in this country.
  • In a deflationary economy in which prices fall.
  • In a recessionary economy in which cash is scarce, unemployment is high and consumer confidence is low.

U.S. - Foreign Currency Exchange Rates
There are complexities in the dynamics of U.S. - foreign currency exchange rates that are beyond the scope of this article. Simply stated - and without describing the additional factors which influence currency value and the prices of imported goods, services and commodities - when the U.S. dollar has a higher purchasing power than the currency of the exporting nation, it has maximum value at that moment and in that transaction.

Conditions can change suddenly, and the dollar may decline in value vis a vis the currency of the exporting nation, and will accordingly lose its maximum purchasing power.

Purchasing power has often been explained using what economists call the "Big Mac Index." Assuming that a McDonald's Big Mac is the same size and weight the world over, the price of this product in various countries is calculated in each nation's currency and compared to the U.S. dollar price. The results indicate whether a foreign currency is over or undervalued against the dollar. Undervalued foreign currency means overvalued U.S. currency - when your money is worth the most.

Your dollar may also be worth more when visiting or living in a foreign country with an exchange rate favoring the U.S. dollar. Many U.S. retirees on fixed incomes have chosen to live in foreign countries such as Mexico or Costa Rica because of the favorable exchange rate.

Deflation Means Lower Prices
In an economy in which prices are falling - the definition of deflation - buyers with cash are in a good position to exploit those circumstances. When prices fall below a certain level, and businesses can't make a profit on their goods and or services because their selling prices are too low, they go bankrupt or out of business. This is not good for the consumer because it eliminates the competition factor which could mean a decline in the quality of goods and services, and a subsequent increase in pricing as fewer firms compete to capture bigger market share.

The Value of Money in a Recession
The expression "Cash is King" is particularly apt in a recessionary economy. People with sufficient cash can get the best deal on almost any purchase which may require financing. The more money a buyer can put down on the purchase of a car, a house, a vacation home, a boat or any item or service that may require financing is less that buyer will pay in finance charges, which is another instance of maximizing buying power.

Your money is also worth more in a recession because you can hire people in a climate of high unemployment for less than that worker would usually earn in a thriving economy. Rather than go jobless, people are willing to work for reduced compensation.

It Takes Work to Make Money Work for You
In the circumstances cited above, your money has maximum purchasing power given the specific conditions of the economy. All economic factors fluctuate and change is constant and relentless. To maintain a financial edge, consumers and investors must continuously research the best prices, the highest interest rate on bonds and certificates of deposit, the lowest financing rates on credit cards and other financed purchases, and the lowest prices consistent with quality of other goods and services. If you diligently do this work, your money will work for you. (Money has been a part of human history for at least 3000 years. Learn how it evolved. See The History Of Money: From Barter To Banknotes.)

Related Articles
  1. Economics

    Economist Guide: 5 Lessons Milton Friedman Teaches Us

    Find out what can still be learned from the late economist Milton Friedman, a Nobel prize winner and champion of free market economics.
  2. Economics

    How Negative Interest Rates Work

    Policymakers in Europe go for the unconventional: negative interest. What could happen?
  3. Economics

    Economist Guide: 3 Lessons Karl Marx Teaches Us

    Read about three lessons that modern economic thinkers can learn from German philosopher Karl Marx, the founding father of communism.
  4. Fundamental Analysis

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
  5. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  6. Economics

    Economist Guide: 3 Lessons Adam Smith Teaches Us

    Learn three critical lessons about economics from 18th century philosopher Adam Smith, considered by many to be the father of economics.
  7. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  8. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  9. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  10. Term

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
RELATED FAQS
  1. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  3. Why isn't the cost-of-living adjustment mandatory?

    A cost-of-living adjustment, or COLA, is a purchasing power protection mechanism provided to all monthly Social Security ... Read Full Answer >>
  4. How are NDFs (non-deliverable forwards) priced

    The price of non-deliverable forward contracts, or NDFs, is commonly based on an interest rate parity formula used to calculate ... Read Full Answer >>
  5. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  6. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center