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What’s In Your Piggy Bank

Don’t you just love how the investment industry uses fancy lingo for everyday experiences. The word of the year is clearly “inflation”, which is just a fancy word for price increases. You used to need to define it, but today’s grocery and gas experience suggests that pretty much everyone is familiar with the concept.

The longer-term issue with inflation is that it means that your cash is losing purchasing power. Today, it would take you around $271,650 to get about the same things as you could purchase with $100,000 in 1985. This means that if you saved $100,000 back in 1985, you could purchase less than half of the goods or services than you could have when you saved that money. While the dollar value in your bank account may have stayed the same, that cash really lost value.

For this reason, inflation means that you need to be mindful of how much money you hold in cash. If possible, it’s best for your cash to generate interest or income so that it grows. Luckily, rising interest rates mean that savings accounts are starting to offer interest income again. Money market funds are also starting to generate some yield. These are relatively low risk ways to help your cash keep its value.

My favorite idea for helping your set-aside cash keep up with inflation remains the I Series Bonds offered by the Treasury Department.

I series bonds pay a base rate + an inflation rate that is reset every 6 months. The current annualized rate on these is 9.62%, backed by the full faith and credit of the US Government. You can read more about these at Treasury Direct.

There are a couple of things you want to make sure that you understand before you invest:

  1. They are illiquid for the first year
  2. You forfeit the last 3 months of interest if you sell them before 5 years
  3. The interest rates reset based on the inflation rate in May and September
  4. The amount you purchase plus the interest is paid when you sell them
  5. Returns are typically taxable but may be tax exempt if used for certain educational purposes
  6. While there are ways to get more, generally, you are limited to $10,000 a year per tax id
  7. The most efficient way to purchase and sell them is via TreasuryDirect.gov

The US Treasury offers a lot of different kinds of bonds, including ones with the word “Inflation” in them. This idea though is for the “I Series Bonds”. Don’t buy a different one, thinking you are getting the I Series Bond.

Unfortunately, your financial advisor can’t really help you with making this investment. They must be held either as paper or at an account that you set up at https://www.treasurydirect.gov/global_open.htm. Again, you are looking for “I Series Bonds” when you purchase.

For most people, their goals include trying to maintain or enhance their standard of living. Mindful cash management can be one way to reach that goal.

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