Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Money Market Fund Returns
Transcript
- Lucas: So here we are, mid-2026, and if you're like a lot of investors I hear from, you finally feel good about earning some interest on your cash. Money market funds are paying around three point six percent. That feels like a win after years of near-zero. Luna: Right, the 'cash is finally earning something' moment. But the inflation headlines keep shifting, and the real story is what your money buys after a year in that fund. Lucas: Exactly. And before we get into the numbers, I want to mention something that keeps this show going. A couple of dollars a month from listeners is genuinely what keeps these episodes ad-free — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small thing that makes a big difference for us, and it means we don't have to clutter the show with ads. Lucas: So, back to the math. The Fed funds rate is at three point six three percent, and the average money market fund yields pretty close to that. But the ten-year breakeven inflation rate — that's the market's expectation for inflation over the next decade — sits at two point two one percent as of yesterday. Luna: So your real after-inflation yield on cash is about one point four percent? That's better than it was in 2021, but it's not exactly wealth creation. Lucas: Right. And the CPI actually ticked down in June — the index moved from three hundred thirty-three point nine eight to three hundred thirty-two point six. That means actual inflation was slightly negative month over month, but the market's still pricing in two point two percent long term. Luna: So even if this month's number is cooler, the expectation is that inflation stays above the Fed's two percent target. That eats into your cash returns over time. Lucas: Exactly. And the issue is that money market funds are not designed to beat inflation. They're for liquidity, for safety, for that emergency fund. But when people start shifting large sums into them — and we're seeing that — they might not realize the slow drag. Luna: How large? Got a number? Lucas: According to the Investment Company Institute, money market funds saw net inflows of about twelve billion dollars last month alone. Part of that is from institutions, but a lot is retail money rotating out of stocks or CDs. Luna: And that twelve billion is now earning a real return of maybe one and a half percent. Over a decade, that's a big difference in purchasing power if inflation averages higher. Lucas: Let's put a ten thousand dollar example on it. If you park ten thousand in a money market fund earning three point six percent for one year, you get three hundred sixty bucks in interest. But after two point two percent inflation, your real gain is about one hundred forty dollars. That's not nothing, but it's less than the 'three point six percent!' headline suggests. Luna: And if inflation picks up? The breakeven is just a market expectation — it could be wrong. If we get a supply shock or wage push, money market funds don't protect you. Lucas: That's the key risk. Money market funds have a floating NAV, but the yield adjusts slowly. Meanwhile, Series I bonds, which are still offering a composite rate based on inflation, could potentially outperform if CPI jumps. But I bonds have purchase limits and lockup periods. Luna: So for someone who's got a big cash pile — say from selling a home or a bonus — what's the move? Not all cash is equal. Lucas: Right. For money you need in the next six to twelve months, a money market fund is fine. But for longer-term savings, you're basically guaranteeing a loss of purchasing power after taxes and inflation. That's where TIPS or even a short-term bond fund might make sense. Luna: And let's not forget the brokerage cash sweep accounts — some of them pay way less than money market funds. I've seen as low as zero point zero one percent on uninvested cash. Lucas: Yes, that's a separate problem. A lot of big brokerages automatically sweep idle cash into their own bank accounts paying near-zero. If you're not manually buying a money market fund, you're getting killed by inflation. That's quietly eating your returns even faster. Luna: So the takeaway: check your sweep vehicle. If you're earning less than the Fed funds rate, you're effectively losing money in real terms. Lucas: And the broader point: don't confuse nominal yield with real return. Money market funds are a parking spot, not an investment. They're great for liquidity, but they won't grow your wealth. With breakeven at two point two one percent, you need to be intentional about where your cash sits. Luna: And for the listener who's wondering: should I move my emergency fund to I bonds? The answer is maybe a portion, but remember I bonds are illiquid for the first year. So keep three to six months of expenses in something liquid like a money market fund. Lucas: Exactly. And you can buy I bonds up to ten thousand per year electronically, plus another five thousand via tax refund. That's a good hedge if you're worried about inflation reaccelerating. Luna: Alright, so next time you see that money market yield in your account, think about what it buys in five years. It's not just about the number. Lucas: And if you've got a different way of handling cash or a question about your specific situation, we'd love to hear from you. Fexingo dot com. We'll be back tomorrow.