Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Erodes Your Emergency Fund
Transcript
- Lucas: Let me ask you something, Luna. You know that standard personal-finance advice everyone gets — keep three to six months of expenses in cash, in a savings account, easily accessible. Luna: Right. The emergency fund gospel. Don't touch it unless the roof caves in or you lose your job. Lucas: Exactly. And for years, that was fine. Cash earned nothing, but at least it didn't lose much either. But here's the thing — with CPI running at 332.4 as of last month, and core CPI at 335.4, that cash is quietly melting. Luna: Melting how? I mean, the number in your account doesn't go down. Lucas: No, the dollar balance stays the same. But the purchasing power drops every month. Let's put a real number on it. Say you have a $15,000 emergency fund. If inflation averages three-point-six percent over two years — which is roughly where the core PCE has been hovering — that $15,000 now buys what about $13,900 bought two years ago. You've lost over a thousand dollars in real terms, just by leaving it in a checking account. Luna: Ouch. So the advice needs an update. But you can't exactly put your emergency fund in the stock market — you need it to be there when you need it. Lucas: Right, and that's the tension. Liquidity versus preservation of purchasing power. The standard solution has been a high-yield savings account, and those are paying something now — maybe three and a half to four percent. But that's barely keeping pace with inflation, and after taxes, you're still falling behind. Luna: So what's the alternative? I've heard people talk about I bonds or TIPS for emergency funds, but the lock-up periods make me nervous. Lucas: Yeah, I bonds have that one-year minimum hold, and you forfeit three months of interest if you redeem before five years. That's fine for a portion, but not for the whole fund. What I've started seeing in some financial-planning circles is a tiered approach. Keep maybe one month's expenses in a plain old savings account — instant access, no drama. Then put the next two months in a short-term Treasury ETF or a high-yield savings account. And then for the rest, consider a ladder of TIPS that mature in one, two, and three years. Luna: A TIPS ladder. So you're getting inflation protection, but you have to plan ahead a little. Lucas: Exactly. You buy TIPS bonds that mature at different dates, so each year a portion of your emergency fund becomes available. The principal adjusts with inflation, so you're not losing purchasing power. And if you really need the money before maturity, you can sell on the secondary market. You might take a small hit on price, but it's nothing like the volatility of stocks. Luna: I like that. It's not all-or-nothing. You're matching the liquidity to the probability of needing it. The first month is truly liquid, the rest is still accessible but working harder. Lucas: And you're not chasing yield with risk you can't afford to lose. Look, we spend a lot of time on this show talking about inflation hedges for portfolios — gold, real estate, commodities. But the cash you're supposed to keep safe matters just as much. If your emergency fund is losing value every year, that's a real cost. Luna: It's one of those things that's totally invisible until you stop to calculate it. I think a lot of listeners might not have thought about their emergency fund as something that needs inflation protection. Lucas: And honestly, that's part of why we keep making these episodes. A handful of listeners chip in monthly through Buy Me a Coffee dot com slash fexingo, and that support is what lets us keep doing deep dives on overlooked topics like this. No ads, no sponsors — just people who find the show useful helping it stay that way. Luna: Yeah, it's a small group, but it makes a big difference. We don't have to chase clicks or sell you something. We can just follow the numbers where they lead. Lucas: Exactly. And that brings us back to the numbers. The ten-year breakeven inflation rate is currently two-point-four percent. That's the market's expectation for average inflation over the next decade. But we've seen how sticky core CPI has been — it's still above three percent. So even the market thinks inflation isn't going away entirely. Luna: Right. So if you're holding a big cash reserve, you need a strategy that acknowledges that. One size doesn't fit all. Lucas: Let's talk about the specifics of building that TIPS ladder. You can buy TIPS directly from the Treasury through TreasuryDirect, or through ETFs. If you go the ETF route, something like a short-term TIPS ETF gives you exposure to bonds maturing in the next one to three years. The yield adjusts with inflation, and you get monthly distributions. The downside is that the ETF price can fluctuate a bit, but over short periods it's fairly stable. Luna: And if you buy individual TIPS at auction, you know exactly what you're getting. You pay par value, you get inflation-adjusted principal at maturity. No surprises. Lucas: Exactly. The trick is to stagger the maturities. Say you decide on a six-month emergency fund. You could put one month in a savings account, then buy a one-year TIPS, a two-year TIPS, and a three-year TIPS, each covering roughly one and a half months of expenses. As each TIPS matures, you roll it into a new one at the long end, keeping the ladder intact. Luna: So you always have a portion coming due soon, but the bulk is protected from inflation. And you're not locking everything up for years. Lucas: Right. And if you never need the money — which is the hope, right? — then you just keep rolling the ladder. Over time, your emergency fund actually grows in real terms, instead of shrinking. Luna: That's a much better place to be than watching your cash quietly lose value. I know some people worry about the complexity, but once you set it up, it's pretty automatic. Lucas: It really is. And you can start small. Even if you just buy a one-year TIPS with a portion of your savings, you're making progress. The important thing is to stop thinking of cash as 'safe' just because the number doesn't change. In an inflationary environment, safe means preserving purchasing power, not preserving a nominal dollar amount. Luna: Great way to put it. So for anyone listening, take a look at your own emergency fund. How many months of expenses do you have? And what's it earning? If it's sitting in a checking account earning nothing, you're leaving money on the table — or rather, you're watching it walk away. Lucas: That's the bottom line. A little planning now can save you hundreds or thousands of dollars in lost purchasing power over the next few years. And it doesn't require taking on stock market risk. Just a smarter way to hold the cash you already need.