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Transcript
- Lucas: So the S&P 500 just hit 7,431. Small caps, via the Russell 2000, surged more than 3 percent in the last week. And a lot of people are looking at their cash and thinking, 'Should I just put this into the market?' Luna: Especially when your high-yield savings account is paying, what, 3.6 percent? And inflation is still running hot. Lucas: Exactly. Core CPI, which strips out food and energy, came in at 336.1 for May. That's up from 335.42 in April. So your cash might be earning 3.6 percent, but after inflation, you're losing purchasing power. And if you're in a 22 percent tax bracket, the after-tax, after-inflation return is actually negative. Luna: Right. So the classic advice of keeping three to six months of expenses in cash — does it still hold when cash is a losing asset? Lucas: I think the number needs to be bigger, and the definition of 'cash' needs to be more nuanced. Let me give you a framework. First, the size of the fund. If your cost of living has gone up 20 percent over the past three years — which it roughly has, cumulatively — then your old three-month fund is now covering only two and a half months of expenses. Luna: So you need to recalibrate to current spending, not what you spent in 2023. Lucas: Exactly. And that's the first step most people skip. They set it and forget it. But then there's the second question: where do you park it? A standard high-yield savings account is paying around 3.6 percent right now, which is the same as the Fed's interest on reserve balances rate — 3.65 percent. Banks tend to follow that. But you could also use a short-term Treasury ladder, or a money market fund, which might yield a little more. Luna: But then you lose some liquidity. If you ladder three-month T-bills, you can only access one rung every few weeks. Lucas: Right. So you need a tiered approach. I'd argue for a three-tier system. Tier one: one month of expenses in a plain high-yield savings account — instant access, no friction. Tier two: two months in a money market fund or a Treasury ETF that settles in one day. Tier three: the rest in a short-term CD ladder or T-bill ladder, where you're earning maybe 4 percent but with a slight delay. Luna: That makes sense. But there's also the opportunity cost issue. The S&P is at all-time highs, small caps are ripping. Some people might feel like they're missing out by keeping so much in cash. Lucas: That's the tension. And it's real. If you look at the Russell 2000's 3.1 percent weekly gain, that's more than a full year's yield on cash in just five days. So the temptation to chase returns is huge. But the emergency fund is insurance, not an investment. You don't judge your home insurance by the return you got when you didn't have a fire. Luna: Yeah, that's a good way to frame it. But what about the argument that you could just use a credit card or a margin loan in a pinch, and keep more money invested? Lucas: I've heard that. And for some people with very stable jobs and high credit limits, it might work. But the risk is that a crisis — say a job loss — coincides with a market downturn. Suddenly your portfolio is down 20 percent, you're selling at the bottom, or you're using margin as the broker is tightening requirements. That's a double whammy. Luna: So cash is still the safest buffer. But with core CPI at 336.1, every month you hold cash, inflation eats a little more. Lucas: It does. So the goal is to minimize the cash drag without sacrificing safety. One thing I've been looking at is I Bonds. They have a variable rate that adjusts with inflation. The current composite rate is around 4.3 percent, which is better than most savings accounts. But there's a one-year lockup, so you can't use them for the first 12 months. Luna: And you can only buy ten thousand dollars a year. So it's not a solution for a full fund if you have higher expenses. Lucas: Right. But it could be part of the tier three allocation. A small piece that's inflation-protected. The larger point is that the era of 'just put it in a savings account' is over. You have to actively manage your cash just like you manage your portfolio. Luna: And that includes checking your bank's interest rate regularly. Some banks are still paying 0.5 percent on savings. That's criminal in this environment. Lucas: Absolutely. If you're earning less than the Fed funds rate of 3.62 percent, you're leaving money on the table. And now, with the Fed holding steady — the daily rate was flat at 3.62 as of June 11 — there's no sign that yields will drop soon. So there's time to make a move. Luna: So for someone listening who has an emergency fund, what's the one actionable takeaway? Lucas: Recalculate the size based on current monthly expenses. Then audit your yield. If you're getting less than 3.6 percent, move to a high-yield account or a money market fund. Then consider layering in a short-term ladder for the portion you can afford to have slightly less liquid. It doesn't have to be perfect. Just don't ignore it. Luna: And if our money conversations have helped you think about a decision like this differently, one really tangible way to support the show is to buy us a coffee. It's buy me a coffee dot com slash fexingo. And we genuinely mean it — that kind of listener support is what keeps this whole thing ad-free. Lucas: Yeah, it's a small gesture that makes a big difference to us. And it helps us keep bringing you conversations like this one. So back to the cash question — the other thing I'd add is to watch the opportunity cost not just in dollars, but in peace of mind. A properly sized emergency fund means you don't have to sell stocks at the worst time. That's worth a lot more than a few basis points. Luna: Right. So you're not just buying liquidity, you're buying the ability to stay invested through volatility. Lucas: Exactly. And with the market at these levels — the S&P up, small caps surging — volatility could come at any time. Having that cash buffer means you can ride it out. Luna: Alright, let's talk about one more data point that surprised me. Gold fell again this week — GLD is down 2.7 percent over five days. But silver is up 4.4 percent. What's going on there? Lucas: That's interesting. Silver has more industrial demand, so it might be reacting to the rally in small caps and the broader economic optimism. Gold, on the other hand, is getting hit by the strong dollar and the Fed pause. But for the emergency fund question, the lesson is that even traditional inflation hedges can be volatile. Cash is boring, but boring works when you need it. Luna: And boring doesn't mean losing money if you manage it actively. Lucas: Exactly. So take 15 minutes this weekend. Check your emergency fund rate. Check your spending. Adjust the size. It's one of the highest-impact, lowest-effort financial moves you can make right now. Luna: Great advice. That's it for this episode of Inflation and Your Money. We'll be back next week. Lucas: Thanks for listening.