Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your High-Yield Savings Account
Transcript
- Lucas: So you open your banking app, you see that number — maybe fifty, maybe a hundred thousand dollars — sitting in a high-yield savings account earning four point two percent. Feels pretty good, right? Feels safe. Luna: It does feel safe. But you're about to tell me it's not actually that safe, aren't you? Lucas: I am. Because that four point two percent is nominal. It's before inflation, before taxes. And right now, with the CPI at three hundred thirty-two point six — that's the June reading — we're looking at year-over-year inflation that's still running hot enough to eat a big chunk of that yield. Luna: So what's the real number? After inflation and taxes, what's a saver actually keeping? Lucas: Let's run it. Say you're in the twenty-four percent federal tax bracket — maybe a bit higher with state taxes. On a four point two percent yield, you lose about one percentage point to federal taxes. So after-tax yield is roughly three point two percent. Then subtract the latest CPI inflation rate — let's call it three percent for the headline. Your real after-tax return is about zero point two percent. On fifty thousand dollars, that's one hundred bucks a year. In real purchasing power, you're basically treading water. Luna: And that's if inflation stays at three percent. But core PCE — the Fed's preferred gauge — just ticked up to one hundred thirty-one point five in May. It's been creeping higher. So the real return might already be negative for some savers. Lucas: Exactly. And here's the thing — a lot of people don't realize that banks are already starting to trim those high-yield rates. The Fed funds rate has been flat at three point six three percent since June. But the market is pricing in rate cuts later this year. Banks anticipate that. So the four point two percent you're seeing today could be three point eight percent in a few months. Meanwhile, inflation isn't falling nearly as fast. Luna: So the gap between what you earn and what you lose to inflation is actually widening for cash savers. That's the quiet erosion. Lucas: Right. And this is the kind of thing that doesn't show up in your monthly statement. Your balance goes up a little each month from interest, so it looks like you're making money. But the purchasing power of that money is slowly leaking away. Over a year, that fifty thousand dollars might buy you forty-nine thousand worth of goods. You don't see it until you go to make a big purchase and realize your money doesn't stretch as far. Luna: I actually had a listener email me about this last week. He had fifty thousand in a savings account earning four point three percent, thought he was being smart. When we ran the numbers — after inflation and taxes — he had effectively lost about eight hundred fifty dollars in real value over the past twelve months. He was shocked. Lucas: That's the rate-chaser trap. People move money from bank to bank chasing the highest promotional rate, but they don't stop to ask: is this even beating inflation after taxes? And look, I'm not saying cash is useless. Everyone needs an emergency fund. But if you have more than, say, six months of expenses sitting in a savings account, you're probably leaving real returns on the table. Luna: And that brings us to the conversation about alternatives. What should someone do with that extra cash? Lucas: The most straightforward move is a short-term Treasury ETF — ticker S-G-O-V is the big one. It holds Treasury bills that are currently yielding around four point three to four point five percent. State tax exempt, so if you're in a high-tax state, that's an extra boost. The duration is very short — under three months — so the price barely moves when rates change. It's essentially cash with a slightly higher yield. Luna: But even that yield is nominal. After inflation, you're still only around one percent real. So it's better, but not a solution for long-term purchasing power. Lucas: Right. For money you won't need for a few years, you might layer in a TIPS fund — Treasury Inflation-Protected Securities. Those adjust the principal for inflation, so the real return is locked in. The current five-year TIPS real yield is around one point eight percent. That's actually positive after inflation. Not huge, but it preserves purchasing power. The trade-off is that TIPS can lose value if real rates rise unexpectedly, so it's not a perfect substitute for cash. Luna: So the hierarchy seems to be: savings account for immediate liquidity, Treasury ETF for a slightly better yield with state tax savings, and TIPS for money you want to protect against inflation over a few years. But what about the psychological side? People feel safer with cash. Lucas: That's real. And I don't want to dismiss it. Cash is sleep-well money. But I think the key is to be intentional. Know exactly how much you need for emergencies — and that number should be based on your actual expenses, not a round number. Anything above that, ask yourself: am I okay with this money losing purchasing power? If not, move it. Even a small shift into a Treasury ETF can add a few hundred dollars a year in real terms. Luna: And speaking of small amounts adding up — it's a similar idea with listener support for this show. A couple of dollars a month from people who find these conversations useful genuinely helps us keep the podcast ad-free and independent. If you've ever gotten a tip from an episode that saved you money or changed how you think about a financial decision, buying us a coffee at buy me a coffee dot com slash fexingo is a tangible way to keep that value coming. It's not about big donations — just small, consistent support from folks who find it worthwhile. Lucas: Yeah, I'd echo that. It's the same principle we're talking about today: small leaks matter, but so do small gains. A few dollars from a few listeners really does keep the lights on. And we appreciate every single one. Luna: Alright, back to the numbers. So we've got this environment where the Fed is holding rates steady at three point six three percent, but Dallas Fed President Logan just came out saying she wants 'modestly' higher rates. If the Fed actually hikes again, that would push savings account yields up temporarily. But it would also likely slow the economy and eventually lead to rate cuts. So the window for high savings rates might be closing. Lucas: Which is exactly why locking in a bit of yield now — through a Treasury ETF or a short-term bond ladder — makes sense. You capture today's rates for a bit longer. With a savings account, the bank can cut your rate overnight. With an ETF, you're holding a portfolio of bonds that were issued at higher rates, so your yield stays elevated until those bonds mature or are sold. Luna: Let's talk about the actual mechanics. If I buy SGOV, what's the yield right now, and how is it taxed? Lucas: As of this week, SGOV's trailing twelve-month yield is around four point four percent. The dividends are mostly from Treasury interest, so they're exempt from state and local taxes. Federal tax still applies. So for someone in a five percent state tax bracket, the tax-equivalent yield is closer to four point six percent compared to a savings account. It's not a massive difference, but on fifty thousand dollars, that's an extra one hundred to two hundred dollars a year after taxes. Luna: And the risk? People worry about ETFs breaking the buck or losing principal. Lucas: SGOV holds Treasuries with maturities under three months. The net asset value fluctuates a tiny bit — maybe a few cents per share — but it's designed to stay close to one hundred dollars. In practice, it's as safe as any money market fund. The bigger risk is reinvestment risk: if rates fall, the fund's yield will drop over time as it buys new, lower-yielding bills. But that's the same with a savings account. At least with the ETF, you're getting the current market rate, not a rate the bank decides to give you. Luna: So the bottom line: cash is not risk-free. The risk is slow, invisible, but real. And the solution isn't to avoid cash entirely — it's to be strategic about how much you hold and where you hold it. Lucas: Exactly. Look at the headline from earlier this week: the Dow is at fifty-two thousand five hundred fifty-three, the S&P at seventy-five thirty-four. Markets are near all-time highs. If you have cash on the sidelines because you're worried about a pullback, that's fine. But don't let that cash rot in a zero real return account. At minimum, put it in a Treasury ETF or a high-yield savings account that's actually competitive. And if you're holding cash for longer-term goals — like a down payment in three years — consider a TIPS ladder or a short-term bond fund. Luna: And check your real return. Don't just look at the nominal rate. Do the math: after taxes, after inflation. If it's below one percent real, you have a problem. Lucas: One last thing: the ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — is at two point two two percent. That's down slightly from two point two three yesterday. So the market thinks inflation will moderate. But breakevens have been wrong before. If you're a saver, you should plan for inflation to be at least two point five percent over the next few years, given the sticky services inflation and the potential for tariffs or supply shocks. That means a savings account earning four percent is barely keeping pace. Luna: So the quiet erosion continues. But at least now listeners know what to look for. Thanks, Lucas. Lucas: Thanks, Luna. Next time, we'll look at how inflation is quietly eating your fixed annuity payouts — a topic near and dear to retirees. Until then, keep your eyes on the real numbers.