Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / The Inflation Tax on Your Savings Account
Transcript
- Lucas: Luna, the latest CPI reading for April came in at 332.4. That's up from 330.29 in March. So prices are still climbing. Meanwhile, the effective Fed funds rate is 3.63 percent. If you have cash sitting in a typical savings account, you might be earning 0.5 percent — maybe 1 percent if you're lucky. Do the math on that and you're losing about 3 percent of your purchasing power every single year. Luna: And yet so many people I talk to think they're being responsible by keeping money in savings. They see the balance going up from interest and feel good about it. But that nominal gain is an illusion. Lucas: Exactly. That's the inflation tax. It's invisible. Your bank statement says you have more dollars, but each dollar buys less. And this isn't a marginal effect — over five years, that 3 percent annual erosion compounds into a 14 percent loss of real value. If you've got $20,000 in a low-yield account, you've effectively lost nearly $3,000 in spending power. Luna: Right. And that's assuming inflation stays at current levels, which it might not. The ten-year breakeven rate is 2.40 percent right now, so the bond market is pricing in some moderation. But even 2.4 percent is still above what most savings accounts pay. Lucas: Before we go deeper on the alternatives — and there are some good ones — I want to mention something small. This show is ad-free and listener-supported. If our conversations have helped you think about your money differently, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep this going. No pressure at all. Luna: And we really appreciate those who do. It makes a difference. Okay, back to the math. So what should someone do with their cash right now? Lucas: First, check what your bank is actually paying. The national average for savings accounts is still below 0.5 percent. But high-yield savings accounts from online banks are offering around 4 percent. That's above the current CPI inflation rate. So you can at least preserve purchasing power, maybe even eke out a small real return. Luna: But there's a catch, right? Those rates aren't locked in. If the Fed cuts rates later this year, those high-yield accounts will drop quickly. Lucas: That's the risk. The Fed's next moves are uncertain. The interest on reserve balances is flat at 3.65 percent, which suggests they're holding steady for now. But if inflation continues to ease, they could cut. So if you want to lock in a rate, consider Treasury bills. A six-month T-bill is yielding around 4.3 percent right now, and it's state-tax-free. That's a better deal for anyone in a high-tax state. Luna: What about Series I bonds? Those are designed specifically to protect against inflation. They have a fixed rate plus an inflation adjustment that resets every six months. Lucas: I bonds are a solid option for long-term savings, but there are limitations. You can only buy $10,000 per year per person, and you can't cash them out for the first twelve months. If you need the money short-term, they're not ideal. But for money you won't touch for a while, the current composite rate is around 4.8 percent, which beats inflation comfortably. Luna: So the takeaway seems to be: don't let your cash rot in a low-yield account. Take five minutes to move it somewhere that at least keeps pace. But there's also the psychological side — seeing your balance in a high-yield account go up feels good, but you have to remember that real gains are what matter. Lucas: Right. And that's the hard part. Our brains are wired to focus on nominal numbers. A $100 interest payment feels like a win, even if inflation is eating $150 of your purchasing power. The key is to calculate your real return — nominal interest minus inflation. If that number is negative, you're losing ground. Luna: And yet, some people avoid investing because they think cash is safer. But cash has its own risk — inflation risk. It's not risk-free. It's guaranteed to lose value over time. Lucas: That's the paradox. The 'safe' choice is actually quite risky. A diversified portfolio of stocks and bonds has historically returned 6 to 8 percent annually, well above inflation. But that comes with volatility. The question is: what portion of your cash do you truly need in the next year? That's your emergency fund. Everything else should probably be invested. Luna: So how much should someone keep in cash? The standard advice is three to six months of expenses. But with inflation, some people are bumping that up to six to nine months, just to be safe. Lucas: I think that's reasonable, especially if your job is less stable. But for the emergency fund itself, you want it in something liquid and safe. A high-yield savings account or a money market fund is fine. Just don't put it in stocks. The last thing you want is to need cash during a market downturn. Luna: One more thing — what about using a CD ladder? Certificates of deposit offer higher rates if you lock in for a year or more. The top one-year CDs are around 4.5 percent right now. Lucas: CDs can work, but again, you're locking up your money. A ladder helps — you stagger maturities so some cash becomes available every few months. But for most people, a high-yield savings account is simpler and offers comparable rates without the lockup. The convenience is worth something. Luna: Alright, so the action plan is: check your savings rate, move to a high-yield account or T-bills, and for longer-term savings, consider I bonds or a simple investment portfolio. Don't let inflation steal your purchasing power silently. Lucas: And run the numbers at least once a year. Inflation changes, rates change. Your strategy should too. That's the real work of protecting your money. Luna: Thanks, Lucas. That was a great reality check. Lucas: Thanks, Luna. Talk to everyone next time.