Tag Archives: Everbank

How to diversify your cash outside of the dollar

Given the mismanagement by the political and economic leadership of the United States, we have been inflating our currency for quite a while. Our currency is gradually being debased, and our purchasing power is being sapped. Many Americans have become the proverbial frog in the pot of water that is slowly being brought to a boil. While we may not be at a rolling boil yet, the little bubbles are starting to rise to the top.
Here is a graph of the Consumer Price Index, the “official” government measure of inflation that many government programs reference for cost of living adjustments and the like:

Consumer Price Index

Consumer Price Index


Here is a chart of the recent price action of the US Dollar Index:

However, this unprecedented dollar creation yields quite a conundrum for many Americans who are paid in US Dollars (USD). What can you do to have your purchasing power preserved? The simple and most obvious answer is to spend your money, and for many Americans during these turbulent economic times, this isn’t difficult to do. However, spending all of your money isn’t a good way to accumulate more, especially using the miracle of the compound interest. In addition, it is important to have some cash in reserve for an emergency fund, for when the unexpected plumbing or roof leak occurs, the engine blows up in your car, or your brother brings strep throat to a family gathering or something similar. Dave Ramsey recommends to his listeners to have an emergency fund of three to six months worth if expenses. If this money is held in USD, it tends to drain away over time as the dollar is weakened by government activities such as deficit spending, “stimulus”, “quantitative easing”, etc.

 

Here are some things that I’m doing to combat inflation with my emergency fund.

I opened a bank account with Everbank.com. This account will let you hold your money in different currencies, or even gold and silver. These currency accounts are perfectly legal for United States citizens, and require no special reporting to the feudal lord, the IRS. They are insured by the FDIC, if having the government back up banks gives you any sense of security. Depending on the amount you have to deposit, funds can be held in CDs or cash accounts. In fact, they have targeted CDs that feature baskets of currencies, some based on geography, or selected for diversity or for a commonality, depending on what you are interested in. These may pay interest, and the interest will be paid in the base currency, and can be converted to USD when you make a withdrawal. These currency accounts will help you diversify outside of the dollar, and give you the potential for some yield from the interest rate also.

In addition to foreign currencies, you can purchase gold and silver. These accounts aren’t insured by the FDIC, and of course currencies or precious metals may fluctuate and you may lose money using this strategy. For the past two years, I have consistently made money using this strategy, but it is certainly possible to lose your money also.

One thing I discovered is that many of the accounts at Everbank require fairly large deposits in order to earn interest. It is not wise to put all of your money in a single currency, so spreading it around may mean that you don’t have enough to earn interest using an Everbank account. I have found a way to earn interest on smaller accounts using a Forex account with Oanda. Here’s the thing to understand about a forex trading account with Oanda–each position will pay or charge you interest based on the prevailing interest rates for each currency. Here is a calculator that Oanda has provided to calculate what the interest would be for a position. Interest is paid daily (even on the weekends) at 3 PM. However, be careful that you fully check out your proposed trades to ensure that you are not going to be surprised by the interest payment. Some currency pairs will charge you interest daily!
Oanda also will allow you to trade very small position sizes. You can make a transaction using a single unit of a currency pair. Oanda allows leveraged forex trading, meaning you can use a relatively small amount of money to trade a much larger amount. I don’t recommend that you leverage everything to the hilt, as this is a good way to lose your money. What I would consider, however, is using leverage to earn interest while keeping the bulk of your funds in an account that allows you to access it easily (Oanda allows one free withdrawal per month). For example, say you had $10,000 that you wanted to protect from inflation. You could take $2000 and open an Oanda account. Using 5:1 leverage, you could purchase foreign currencies that pay interest, such as the Norwegian Kroner (NOK). Leave the remaining $8000 in your bank. If you need the money, write a check out of the $8000 that is in the bank, and reduce your position size in your Oanda account so your currency hedge remains balanced. If you needed to write a check for $5000, you would write this out of your bank account, and you would close half of your position in Oanda.
This strategy will allow you to gain the possibility of interest while protecting you from any decline in the dollar. However, if the dollar strengthens, you will lose money.

A couple of more considerations merit consideration. First, what currencies should you consider when diversifying? I would suggest currencies from countries that have nearly balanced books, and are net exporters. Obviously interest paying currencies are attractive as well, but some of them have high interest rates because they have inflation that they are trying to deal with, not because they are the most stable currencies. Some quick ones to consider are Swiss Franc (CHF), Norwegian Kroner (NOK), Singapore Dollar (SGD) and New Zealand Dollar (NZD). It is up to you to decide which ones may work for you; I’m not recommending any specific ones.
The other consideration is whether diversifying into foreign currencies is prudent with you money. I do not believe it is prudent to put all of your eggs in one basket, and if you keep it all in USD you are essentially doing that. However, it may not be prudent to try one of these ideas in every circumstance. Your emergency fund needs to be well protected, and I wouldn’t expose it to unneeded risk. Given the reckless actions of our economic policy makers, I believe you are taking unnecessary risk if you leave it all in USD, but certainly there are many who would disagree with me. I certainly have had good results with these strategies, and unless the United States balances its budget, starts manufacturing, and stops printing money, I expect that results in the near future will be similar. However, I recommend you do your own research and come up with your own conclusions.

Tip- If you are interested in using Oanda, I suggest you open a small account and make some very small trades (as mentioned previously, you can make trades as small as one unit) to get a feel for the interface and see how the interest payments work.  While not impossibly difficult to implement this strategy, it is possible to make some mistakes that could cost you money.  Be careful! Research what I’m suggesting before you attempt it.

-Proprietor

I do not have any affiliation with either Everbank or Oanda other than being a customer. I have not been compensated in any way for writing this post.