Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Sinking Fund
Transcript
- Lucas: So Luna, I was looking at the latest CPI print from July — the index ticked up to 332.8. That's about an eight-tenths of a percent increase from the previous month, and the year-over-year number is still sitting around eight percent. Luna: Eight percent? That's still painfully high. But today we're not talking about your emergency fund or your retirement account, right? Lucas: Exactly. We've covered emergency funds before. Today I want to talk about something a little more mundane but just as important: the sinking fund. You know, the money you set aside for a known future expense — a new roof, a car in three years, maybe a big vacation. Luna: Oh, I have one of those. I've been squirreling away cash for a kitchen remodel. It's sitting in a regular savings account earning, what, zero point four percent? That's barely anything. Lucas: Right. And that's the thing — with inflation running at eight percent, that cash is losing purchasing power every single month. Let's do the math. Say you've got ten thousand dollars in a sinking fund for a new car. At eight percent annual inflation, after one year, that ten grand only buys about nine thousand two hundred dollars worth of car. Luna: So I'm effectively losing eight hundred dollars just by holding cash. That hurts. Lucas: It does. And it's worse if your timeline is longer. Over three years, that same ten thousand dollars shrinks to about seven thousand nine hundred in today's dollars. You'd need to save more each month just to keep up. Luna: So what are the options? I could put my kitchen fund in some kind of investment, but I need that money in a year or two. I can't afford to see it drop twenty percent. Lucas: Right. And that's the tension. You want safety of principal, but you also want to keep up with inflation. The obvious solution is a high-yield savings account. They're currently paying around four and a half percent. That's not eight, but it's better than zero point four. Luna: I've seen those. But are they really that easy? I always worry about the fine print. Lucas: Mostly, yes. They're FDIC insured up to two hundred fifty thousand dollars, and the rates are variable. But the key is to shop around — online banks tend to offer better rates than the big brick and mortar ones. Still, four and a half percent doesn't beat eight percent inflation. Luna: So what else? I've heard about I-bonds. Those are supposed to be inflation-protected, right? Lucas: Yeah, I-bonds are a solid option for money you won't need for at least a year. They're issued by the Treasury, and the rate adjusts with inflation. Right now, the composite rate is around five percent, which is better than high-yield savings. But there's a catch. Luna: There's always a catch. Lucas: You can't redeem them within the first twelve months, and if you redeem before five years, you forfeit the last three months of interest. So they're great for a sinking fund with a longer horizon, but not for a down payment next spring. Luna: That makes sense. What about something like a short-term Treasury ETF? I see those mentioned a lot. Lucas: Short-term Treasury ETFs, like ones that hold bills with maturities under a year, are another option. They're very low risk and currently yielding around five percent. But the price can fluctuate slightly, so you might have a tiny loss if rates rise. For a sinking fund, that's usually acceptable if you're not going to need the money tomorrow. Luna: Okay, so we've got high-yield savings, I-bonds, and short-term Treasuries. How do I choose? Lucas: It comes down to your timeline and your comfort with a little volatility. If you need the money within a year, high-yield savings is probably your best bet. If you can wait a year or more, I-bonds lock in that inflation protection. And if you're somewhere in between, a short-term Treasury ETF might be worth the tiny bit of risk. Luna: So it's not one-size-fits-all. And I guess that's the point — you have to match the tool to the job. Lucas: Exactly. And here's a concrete tip: set up a separate high-yield savings account just for your sinking fund, and automate a monthly transfer. That way, you're not tempted to dip into it, and the interest at least keeps you a little closer to keeping up. Luna: That's a good idea. I think I'll move my kitchen fund into a separate account this weekend. I've been meaning to do it for a while now. Lucas: Do it. And if this conversation has made you think a little differently about your own sinking fund, that's great. You know, these episodes stay ad-free because listeners like you support the show. If you found value in this, buy me a coffee dot com slash fexingo. It helps us keep doing what we do. Luna: Yeah, it's a small gesture that goes a long way. And we appreciate every one of you who's ever contributed. Lucas: Alright, back to the numbers. So we've talked about where to put your sinking fund, but there's another angle: how much should you actually be saving each month? Luna: I figured I'd just divide the total cost by the number of months. Is that wrong? Lucas: Not wrong, but it ignores inflation. If your new car will cost thirty thousand dollars in three years, and inflation runs at eight percent for the next twelve months, the price might be closer to thirty-two thousand by the time you're ready to buy. So you need to factor that in. Luna: So I should be saving more than the current price divided by months. Lucas: Right. A simple way is to assume a modest inflation rate, say three percent, and increase your monthly contribution by that amount each year. Or you could just round up your target by ten or fifteen percent to be safe. Luna: And what about those of us who are further out, like five years? Does the strategy change? Lucas: With a longer horizon, you might consider a slightly more aggressive approach, like a short-term bond fund with a little more duration, or even a balanced fund if you're okay with some risk. But the key is to stay liquid enough that you can access the money when you need it. Luna: Got it. So it's all about matching the risk to the timeline. Lucas: Exactly. And one more thing — don't forget to review your sinking fund contributions at least once a year. As inflation changes, your target might need to adjust. Luna: That's a good reminder. I know I've set mine and forgotten about it for years at a time. Lucas: Which is exactly the trap. So, to wrap up: high-yield savings for short-term, I-bonds for the one-to-five-year window, and short-term Treasuries for that middle ground. And always adjust your monthly contribution for inflation. Luna: I think that's a solid plan. Thanks, Lucas. I'm actually going to move that money tomorrow. Lucas: Happy to help. And if anyone has a question about their own sinking fund, write in — we read everything. Luna: See you next time.