Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Your Cash Is Losing Value Faster Than You Think
Transcript
- Lucas: So the effective Fed funds rate is sitting at 3.63 percent, and the 10-year breakeven inflation rate is at 2.36 percent. On paper, that means your cash is earning a positive real return – about 1.27 percent after inflation, if you're lucky enough to get the full Fed funds rate on your savings. But the reality for most people is very different. Luna: Right, because the bank isn't paying you the Fed funds rate. The national average for a basic savings account is still well under one percent. Lucas: Exactly. And that's the disconnect we're going to talk about today. I'm Lucas. Luna: And I'm Luna. You're listening to Inflation and Your Money with Fexingo. Lucas: And if you've found these conversations helpful – if they've changed how you think about your money – we want you to know that this show is ad-free by design. No sponsors, no commercial breaks. That's a choice we've made because we think the topic deserves straight talk. If you'd like to support that choice, the link is buy me a coffee dot com slash fexingo. No pressure, just an option for anyone who values the work. Luna: Yeah, it's a small gesture that keeps the lights on and lets us keep digging into these angles without worrying about selling something. Appreciate every person who's chipped in. Lucas: Alright – back to why your cash might be quietly shrinking. Let's look at the math. CPI is at 332.4 as of April, up from 330.29. That's roughly 2.4 percent annualised inflation, which is actually down from the peak but still high enough to matter. Luna: So if you're earning 0.5 percent at a big bank, you're losing nearly two percent of purchasing power every year. On ten thousand dollars, that's about two hundred bucks gone. Lucas: And that's before you pay taxes on the interest. If you're in the 22 percent federal bracket, you lose another chunk. So your real after-tax return is negative. You are guaranteed to lose money by holding cash in a standard savings account right now. Luna: Which is crazy when you think about it. The Fed has held rates above 3.5 percent for over a year, but the banks have been slow to pass that along to depositors. Lucas: They have. And there's a reason for that – bank deposits are sticky. Most people don't switch accounts even when rates are low. But the ones who do shop around can find high-yield savings accounts paying around 4 percent right now. That changes the math significantly. Luna: Four percent – that actually beats the CPI. So the problem isn't that there's no option, it's that most people aren't using it. Lucas: Exactly. But even a high-yield savings account has a ceiling. The rate is variable, so if the Fed cuts, that four percent could become three percent or lower. And you're still exposed to inflation risk because the rate can change at any time. Luna: That's where I Bonds come in. The Treasury's Series I savings bond is designed specifically for this – it pays a fixed rate plus an inflation adjustment that resets every six months based on CPI. Lucas: Right. And right now, the composite rate on I Bonds issued through April 2026 is 3.11 percent. That's not spectacular, but it's guaranteed to keep pace with inflation over the life of the bond. And the interest is tax-deferred until you redeem, which is a nice bonus. Luna: But there are trade-offs. You can only buy ten thousand dollars per year per person electronically, and you can't cash them out for the first twelve months. So it's not a substitute for your emergency fund. Lucas: No, it's more of a savings vehicle for money you won't need for at least a year. For someone building a second-tier emergency fund or saving for a specific goal three to five years out, it's actually a pretty good fit. The inflation protection is built in, and the tax deferral helps. Luna: Let's talk about that tax deferral for a second. If you hold I Bonds for ten years, you don't pay any tax on the interest until you redeem. That means your money compounds without the drag of annual taxes. That's a real advantage over a savings account where you're taxed on interest every year. Lucas: It's a big deal. Over a decade, that compounding difference can add up to hundreds of dollars. The flip side is that the interest rate on I Bonds is capped by law – the fixed component is set at issuance and can be zero or very low, like it was in the 2010s. So you're not going to get rich on I Bonds. But they will preserve your purchasing power, which is the whole point. Luna: And in a world where the stock market just dropped 2.3 percent in a week – the S&P 500 closed at 7,432 on Friday – having a portion of your portfolio that's inflation-proof and doesn't fluctuate in value is comforting. Lucas: That's a good point. The NASDAQ fell almost 4 percent over the same five days. So while cash and I Bonds aren't exciting, they are stable. And in this environment, stability has real value. Luna: What about Treasury Inflation-Protected Securities, TIPS? Those are another option, right? Lucas: Yes, TIPS are essentially the same concept but tradeable on the open market. The principal adjusts with CPI, and you get a fixed coupon on top. Right now, 10-year TIPS are yielding about 1.8 percent real. That's your guaranteed return above inflation. If you buy at auction and hold to maturity, you know exactly what you'll get in real terms. Luna: But TIPS have a downside – if inflation comes in lower than expected, the principal adjustment is smaller. And if you sell before maturity, the price can fluctuate based on interest rates. Lucas: Right. TIPS are more volatile than I Bonds. But the liquidity is better – you can buy and sell them in the secondary market. For larger amounts, TIPS might make more sense than I Bonds because of the ten thousand dollar annual purchase limit. Luna: So the takeaway seems to be: don't just leave your cash in a zero-interest checking account. At a minimum, move it to a high-yield savings account. For longer-term savings, consider I Bonds or TIPS to lock in inflation protection. Lucas: That's the core message. And I'd add one more layer – if you're in a high tax bracket, municipal bonds might also be worth looking at, because the interest is federal tax-free. But that's a different conversation. Luna: We could do a whole episode on munis. But today, the key number is that the average savings account pays less than 0.5 percent while inflation is running at 2.4 percent. You are losing money in real terms. Period. Lucas: And with the Fed on hold – the interest on reserve balances is still at 3.65 percent – there's no sign that banks will suddenly get more generous with depositors. The onus is on us to move our money. Luna: Alright, so let's end with a practical checklist. Step one: check what your savings account is paying. Step two: if it's under 3 percent, open a high-yield savings account online. Step three: for money you won't need for a year or more, buy I Bonds through TreasuryDirect. Lucas: And step four: don't forget that inflation is still sticky. Core CPI is at 335.4, up from 334.17 a month ago. So this isn't a problem that's going away. The best time to inflation-proof your cash is now. Luna: Well said. That's our show for today. We'll be back tomorrow with another angle on inflation and your money. Lucas: Until then, keep an eye on those real returns.