Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Emergency Fund
Transcript
- Lucas: So we talk a lot on this show about how inflation chips away at specific assets — bonds, gold, even your credit card rewards. But there's one cash account that might be the most vulnerable of all, and it's the one you're probably not supposed to touch. I'm talking about your emergency fund. Luna: Oof. The sacred three to six months of expenses. Are you telling me that's not safe either? Lucas: It's safe in the sense that it won't lose nominal value — you won't see a lower balance on your statement. But in real terms, it's bleeding. And the latest CPI numbers show that even as inflation cools, prices are still higher than they were a year ago. The index came in at 332.6 for June, down slightly from last month, but that's still a lot of cumulative price growth on top of the last few years. Luna: So when you say 'bled,' how bad is it exactly? Lucas: Let's put a number on it. Say you have ten thousand dollars sitting in a typical savings account earning maybe four percent right now — that's generous, actually. Inflation over the past year, as measured by CPI, has been running around two and a half percent. So after taxes, your real return is barely positive. But the bigger issue is that if your emergency fund was set up a few years ago, you sized it based on expenses that were maybe fifteen percent lower than today's costs. Luna: I hadn't thought about it that way. It's not just the interest rate — it's that the baseline itself has moved. Lucas: Exactly. And that's why I want to focus on this today. Because if you built your emergency fund in 2020 or 2021, your rent, your grocery bill, your insurance premiums — all of those have gone up. So that six-month buffer might now cover only four and a half months of actual expenses. Luna: So what's the fix? Do we need to just dump all our cash into stocks and hope for the best? Lucas: No, and that's the wrong trade. The whole point of an emergency fund is liquidity and capital preservation. But there are ways to keep your cash working harder without taking on equity risk. For one, you can shop around for a high-yield savings account or a money market fund. The effective fed funds rate is still at three point six three percent, and you can find yields close to that with virtually no risk. Luna: That's not bad. But is it enough to actually keep up with inflation? Lucas: Right now, the ten-year breakeven inflation rate is two point two eight percent. So if you're earning three and a half percent on a money market fund, you're beating expected inflation. The problem is that inflation has been surprising to the upside before. And also, those yields can change quickly. Luna: True. And I guess that's where a Treasury ladder comes in. You can lock in rates for a few years, right? Lucas: Yes. A short-term Treasury ladder is a great middle ground. You buy T-bills or notes that mature in, say, three, six, nine, and twelve months. You get a slightly higher yield than a savings account, you have a rolling maturity so you always have access to cash, and you're lending to the U.S. government, so credit risk is basically zero. Luna: And that way, you're not fully exposed if rates drop. Because something matures every few months and you can reinvest at the new rate. Lucas: Right. But here's the thing — and this is the honest part — no cash strategy is going to make you rich. The emergency fund is insurance, not an investment. The real goal is to make sure it doesn't lose its value while you're not looking. Luna: So maybe the bigger move is to actually re-size the fund based on today's expenses, not the ones from five years ago. Lucas: That's the takeaway. And to do that, you need to know what your monthly essentials actually cost now. Not what you spent in 2021. So a practical exercise: pull your bank statements from the last three months, add up the non-negotiable stuff — housing, utilities, groceries, transportation, insurance, minimum debt payments — and multiply by six. That's your new target. Luna: I like that. It's concrete and it forces you to face the real numbers. Lucas: And if you're lucky enough to have a surplus, you can think about whether it's worth putting some of it to work in a diversified portfolio. But the core of the emergency fund — that first three to six months — should stay in cash equivalents. No exceptions. Luna: Before we go further, I want to bring up something that's been on my mind. We do these episodes every day, and it's easy to forget that it's a real labor of love. We're not backed by a big network or ads. Lucas: Yeah, that's true. Look, a lot of listeners have asked how we keep this going without constant sponsorship reads. And the honest answer is: a handful of people chip in a few bucks a month through buy me a coffee dot com slash fexingo. That's literally it. It's listener supported. Luna: And it's not about getting anything in return. It's just that if our conversations have helped you think about your own money a little differently, it's a way to keep the lights on. No pressure, ever. Lucas: Right. So if that's something you've been thinking about, we'd be grateful. But let's get back to the emergency fund, because there's one more trap I want to flag. Luna: Oh, what's that? Lucas: The trap of treating your emergency fund as a slush fund. With inflation, there's a temptation to dip into it for things that aren't true emergencies — a vacation, a new phone, a 'great deal' on something you don't need. But every dollar you take out loses its inflation protection, and you're also shrinking your buffer. Luna: So discipline is part of the strategy. Lucas: Absolutely. And there's a psychological benefit too. When you know your emergency fund is fully funded and earning a decent yield, you're less likely to panic sell in a market downturn or make rash financial decisions. Luna: That's a good point. I read that the small-cap index, the Russell 2000, is down a bit this week, and the VIX is still elevated. Having that cash cushion gives you the confidence to ride out the noise. Lucas: Exactly. And that's also why I want to mention that the S&P 500 is hovering near record highs, but nobody knows what's next. Having a cash buffer means you're not forced to sell at the worst time. Luna: Let's talk about where to actually park this money, because there are a lot of options and it can get confusing. Lucas: Good. So, tier one is your basic checking or savings account at the big bank. It's convenient, but yields are often pitiful — like one percent or less. That's where the inflation erosion is most brutal. Luna: So the first move is to move that cash to an online high-yield savings account. I've seen some offering four percent or more. Lucas: Yes. And those are FDIC insured up to two hundred fifty thousand dollars, so it's just as safe. The only downside is it might take a day or two to transfer, but for an emergency fund that's fine. Luna: What about money market funds? I know some people are nervous about those. Lucas: Money market funds are not FDIC insured, but they invest in very short-term, high-quality instruments like Treasury bills and commercial paper. They're considered extremely safe, and they often yield a bit more than a savings account. Just make sure you're in a government or prime fund, not a floating NAV one. Luna: And then the Treasury ladder covers the longer end of the cash spectrum. Lucas: Right. And if you want to get a little more sophisticated, you could use a series of CDs, but those tie up your money for a fixed term. The ladder gives you more flexibility. Luna: So the key is to not leave your emergency fund just sitting in a zero-yield checking account. Lucas: Exactly. The average yield on a standard savings account is still below inflation. So if you're doing that, you're not just losing to inflation — you're falling further behind every month. Luna: We should also mention that some people use a Roth IRA as part of their emergency fund because contributions can be withdrawn tax-free. Is that a good idea? Lucas: It's a controversial move, but it can make sense for some people. The benefit is that the money grows tax-free and you can withdraw contributions anytime without penalty. The downside is that if the market drops, your emergency fund could shrink right when you need it. So I'd only consider that if you have a separate, more conservative buffer too. Luna: That's a nuanced take. It's not a simple yes or no. Lucas: And that's the theme of today's episode, really. Protecting your purchasing power is not about finding one perfect vehicle. It's about understanding how inflation interacts with your safety net, and making deliberate choices. Luna: So to sum up, check your current monthly expenses, re-size your fund accordingly, move your cash to something that yields at least three and a half percent, and don't touch it unless it's a true emergency. Lucas: That's the plan. And remember, a fully funded emergency fund isn't just a financial buffer — it's a sleep-at-night asset.