Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / The Inflation Tax on Uninvested Cash
Transcript
- Lucas: So the NASDAQ just had its worst week in over a year — down five point one percent in five days. And whenever markets drop like that, I hear the same question: should I just move everything to cash and wait it out? Luna: It's tempting. Cash feels safe. No red numbers, no stomach churn. Lucas: Right — but here's the thing. Cash has a hidden cost that's not in the monthly statement, and it's actually worse right now than it's been in a while. I'm talking about the inflation tax. Luna: You mean the fact that your dollar buys less tomorrow than it does today. Lucas: Exactly. And when you hold cash — even in a savings account — you're effectively accepting a guaranteed loss of purchasing power if the nominal interest rate is lower than inflation. Let me give you the numbers. The Fed funds rate is at three point six two percent. The CPI reading from April is three hundred thirty-two point four, which was up from three hundred thirty point twenty-nine the month before. That annualizes to something around three point two percent core. Luna: So if your high-yield savings account is paying, say, four percent, you're maybe making eighty basis points in real terms? That's not terrible. Lucas: It's not terrible if you're earning four percent. But the average savings account in America still pays less than one percent. And even the best online accounts — the ones offering four to four point five percent — those rates are starting to drift down as the Fed holds steady. The ten-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, is at two point three six percent. So the market itself is saying inflation isn't going back to two percent anytime soon. Luna: And that's the key — it's not just the current CPI print. It's the expectation that inflation stays above two percent for years. Lucas: Precisely. So if you're sitting on a big cash pile waiting for the market to 'get safe,' you're locking in a negative real return for years. I saw a survey recently — Luna, you mentioned this — that something like forty percent of Americans keep more than five thousand dollars in a checking account earning zero interest. Luna: Yeah, that was from a Bankrate survey last month. Forty percent. And that's just checking accounts — not even counting savings accounts paying under one percent. Lucas: So let's do the math. Five thousand dollars in a zero-interest checking account with inflation at three percent. After one year, that five thousand has the purchasing power of about four thousand eight hundred fifty dollars. You lost a hundred fifty bucks without spending a dime. After five years, you're down to about four thousand three hundred in today's dollars. Luna: That's the inflation tax. And it's completely silent — no bill, no fee line item. Lucas: Now, I'm not saying nobody should hold cash. Emergency funds are essential. Three to six months of expenses in a liquid account is smart. But the definition of 'cash' matters. If it's in a money market fund yielding four point two percent, you're treading water. If it's under the mattress or in a checking account earning nothing, you're actively losing ground. Luna: So what do you recommend for the cash you do need to keep liquid? Lucas: For the emergency fund, a high-yield savings account or a money market fund — something yielding at or near the Fed funds rate. For cash you might not need for a year or more, consider Series I savings bonds. The current composite rate is around three point five percent — that's the fixed rate plus the inflation adjustment. Or short-term TIPS ETFs, which adjust principal for inflation. The key is: don't let your cash just sit there earning zero while inflation eats it. Luna: And what about the argument that cash is a good hedge during market sell-offs? You can buy the dip. Lucas: That's a valid point — but only if you have a plan. If you're holding cash specifically to deploy during corrections, that's a strategy. But most people aren't doing that. They're holding cash out of fear, and they end up sitting on the sidelines for years. The S&P 500 is at seven thousand three hundred eighty-four today. It was at about five thousand five hundred at the start of 2024. If you'd moved to cash then because you were nervous, you missed a thirty-four percent gain. Luna: And you also suffered the inflation tax on that cash for two and a half years. Lucas: Right. The double whammy. So the real question is: what is your cash doing for you? If it's not working — if it's not earning a return that at least keeps pace with inflation — it's actually costing you. And that's a cost most people never calculate. Luna: It reminds me of something you said a few episodes back: inflation is the cruelest tax because it's invisible and it hits everyone, especially people who are trying to be safe. Lucas: That's the whole tragedy. The people who are most risk-averse — retirees, first-time home buyers saving for a down payment — they're the ones most exposed to the inflation tax. And they're the least likely to realize it's happening. Luna: If our money conversations have helped you think about a decision differently — like whether to hold more cash or how to make your savings work harder — that's exactly why we do this show. And if you find value in these episodes, you can support the show by buying us a coffee at buy me a coffee dot com slash fexingo. Just a simple way to keep the podcast ad-free and focused on what matters. Lucas: Yeah, and it genuinely helps us keep the lights on and the research deep. So thank you to anyone who chooses to do that. Now, back to cash — one more point I want to make about the opportunity cost. Luna: Go ahead. Lucas: The recent market sell-off — the NASDAQ down five percent, gold down almost three percent — that might actually be creating buying opportunities. But if you're fully in cash, you're not positioned to take advantage. The trick is to have a portfolio that's allocated so you don't need to time the market. You have some cash for emergencies, some bonds for stability, and stocks for growth. Then when stocks drop, you rebalance — you sell some bonds and buy stocks. That's the mechanical way to 'buy the dip' without trying to predict anything. Luna: So you're saying cash is not necessarily the safe haven people think it is. Lucas: Exactly. The real safe haven is a diversified portfolio that matches your time horizon. For money you need in five to ten years, stocks have historically beaten inflation. For money you need in one to five years, short-term bonds or TIPS. For money you need tomorrow, cash — but cash that's earning something. Luna: It's a good reminder that every dollar has a job. And if its job is just to sit there, it's not doing it well. Lucas: Right. So next time you look at your bank balance and feel good about the number, remember to check what that number can actually buy. That's the only number that matters.