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.)