Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Health Savings Account
Transcript
- Lucas: The latest CPI reading puts headline inflation at 332.6 — down from 333.98 a month earlier. So inflation is easing, but it's still positive. And there's one account where that slow erosion is especially dangerous: your health savings account. Luna: Because most people treat their HSA like a checking account for medical bills. They don't invest it. Lucas: Exactly. And the numbers bear that out. The Employee Benefit Research Institute found that nearly 40 percent of HSA assets are sitting in cash. That cash is losing purchasing power every year. If you have a two-thousand-dollar balance earning, say, 0.1 percent interest, after a decade of 2.5 percent inflation, that two thousand is worth about fifteen sixty in today's dollars. Lucas: And that kind of real-world math is exactly what we try to bring you on this show. If our conversations have helped you think differently about your money, a couple of dollars a month at buy me a coffee dot com slash fexingo genuinely makes a difference. It keeps this whole thing ad-free and listener-supported. Luna: Yeah, it's a small way to keep these topics coming. So, back to the HSA — what's the alternative? Investing it? Lucas: Right. The HSA is actually one of the most powerful retirement accounts because it's triple tax-advantaged. You contribute pre-tax, it grows tax-free, and withdrawals for qualified medical expenses are tax-free. But that triple benefit only works if you actually invest the money. Luna: So you're saying leaving it in cash is wasting the tax advantages. Lucas: Exactly. Let's run the numbers. Say you're thirty-five and contribute three thousand dollars a year to your HSA for thirty years. If you leave that in cash earning one percent, you'll have about ninety-three thousand dollars. But if you invest it in a diversified portfolio earning seven percent after inflation, you'd have over two hundred eighty thousand. That's almost three times more money for medical expenses in retirement. Luna: And because HSA withdrawals are tax-free for medical costs, you're not giving any of that growth to the IRS. Lucas: Precisely. And with the Fed funds rate at 3.63 percent, some HSA cash accounts are yielding two or three percent. But after inflation at around 2.5 percent, that's a real return near zero. Meanwhile, the stock market has historically returned seven to ten percent annually. So the opportunity cost of cash is enormous. Luna: But isn't it risky to invest money you might need for a medical emergency next month? Lucas: That's a fair concern, and it's why most experts recommend keeping one year's out-of-pocket maximum in cash within your HSA, and investing the rest for the long term. That way, you have a safety net, but the bulk of your savings is actually growing. Luna: So treat your HSA like a retirement account, not a checking account. Lucas: Exactly. And many HSA providers now offer low-cost index funds or target-date funds, so you can set it and forget it. The key is to choose an investment option that matches your risk tolerance and time horizon. Luna: What about people who are already maxing out their 401k and IRA? Should they prioritize the HSA? Lucas: Definitely. In fact, the HSA is often called the 'super IRA' because of the triple tax advantage. If you have to choose between funding a Roth IRA and an HSA, and you have high medical costs in retirement, the HSA might actually be better. But either way, investing inside the HSA is what unlocks its full potential. Luna: So we're not just talking about inflation eating your cash — we're talking about missing out on decades of compound growth. Lucas: Exactly. And with headlines about oil prices ripping higher and odds of a Fed rate hike rising, inflation could easily stay above target. So the time to act is now. Next time you get a raise or a bonus, consider boosting your HSA contribution — and actually invest it. Luna: That's a concrete step anyone can take this quarter. Lucas: It really is. And while you're at it, check what your HSA is currently invested in. If it's sitting in cash, make the switch today. Future you — hopefully with healthier finances — will thank you.