The bear market is upon us. Not only are stocks and bonds both losing value, but coupled with inflation, the value of cash itself is diminished, too.
What options do we have?
For some answers and online DIY “hacks,” I spoke to J.R. Robinson, founder of Kakaako-based Fee-Only Planning Hawaii and contributor to Journal of Financial Planning, NerdWallet, Christian Science Monitor and other publications.
“Many consumers,” says Robinson, “perceive cash to be a safe, liquid store of value, and in times of no inflation it is.” However, he stated, “This is not a time of no inflation.”
As measured by the urban consumer price index (CPI-U), he noted that inflation for the past six months rose by more than 9%, the largest increase since the 1960s. If inflation remains at this level, $100,000 in a 0% checking account will lose 9% of its purchasing power over the next year.
Is there a way to earn more interest without putting your principal at risk and without tying up your money for too long?
One quick, easy hack Robinson suggests is putting your everyday savings and emergency reserve money into FDIC-insured online banks. Rates today on cash in these types of deposits are typically yielding 1% or more and are edging higher. Even though this is still far below the inflation rate, it is still better than the paltry .01-.03% most local banks and credit unions are paying.
He recommends Bank rate.com as a good site for comparing online bank rates. He also notes that establishing an online bank account does not mean you should close your convenient local bank account. He suggests simply linking your online account to your local bank account to establish on-demand, bidirectional electronic funds transfers.
For savings that can be invested for a year or more, Robinson’s top recommendation is Series I Savings Bonds. This savings bond, he says, “provides a near-perfect hedge against inflation since the interest paid is adjusted 1-to-1 in proportion to the inflation rate.” Consumers who purchase six-month I-bonds between now and the end of October will earn 4.81% (9.62% annualized) for the first six months that they own them. “This exactly matches,” says Robinson, “the CPI-U.” Consumers should know that I-bonds must be held for at least 12 months, and there is a three-month interest penalty if cashed within five years.
Consumers are also limited to purchasing $10,000 per person per calendar year.
The upshot is that the Series I Savings Bonds offer a rate that is much higher than comparable bank deposit rates. “You’ll get a whopping 0% real return instead of a negative real return,” opines Robinson, “but that’s going to beat your bank deposit numbers by a long shot.”
To purchase I-bonds, you don’t need a broker or financial adviser. Savings bonds can be purchased only through the U.S. Treasury Department website, treasurydirect.gov Opens in a new tab. Says Robinson, “The current six-month yield on I-bonds really is a generational opportunity. It is the highest rate the Treasury has ever paid on them.” However, he cautions consumers that the TreasuryDirect website is dated, and navigation can be confusing.
Beyond savings bonds and online bank accounts, Robinson says consumers who wish to get their cash working harder might do well to consider Treasury bills, Treasury Inflation Protected Securities and brokered CDs as further alternatives to low- or no-yielding bank deposits.
U.S. Treasury bills can also be purchased at no cost through Treasury direct in maturities ranging from a few days to 52 weeks, and there is no dollar limit. The current 52-week yield is approaching 3%, and the interest is exempt from state income tax.
Robinson notes that federal income tax reporting of the annual inflation adjustment diminishes TIPS’ desirability in taxable accounts, but they may be a particularly good inflation hedge in IRAs.
Because the interest on CDs is subject to both federal and state income tax, CD yields tend to be slightly higher than Treasurys, and are often a great alternative for short-term IRA money.
As a final suggestion, he recommends that long-term investors seeking passive income that could rise over time to keep pace with or even keep ahead of inflation might wish to consider building a portfolio of individual stocks with a history of increasing their dividends each year. Robinson suggests SimplySafeDividends.com as an excellent resource for researching and screening for such companies.
———
Rob Kay, a Honolulu-based writer, covers technology and sustainability for Tech View and is the creator of fijiguide.com Opens in a new tab. He can be reached at Robertfredkay@gmail.com.
