April 16, 2008

2087459804 B88ba426fa MIf I told you about a popular investment product that was yielding 40% less than it did last year, you’d probably think it was one of the great financial meltdowns of 2008. But, what if I also told you that investors seemed indifferent to this product’s decreased yield and were actually accelerating their rate of investment? Quite a paradox, no?

As you’ve probably realized, I’m talking about Money Market and Cash investments. Using data from Fidelity, I went back and pulled client statements to see what their blue chip Cash Reserves fund was paying as of March 31, 2007 and March 31, 2008. Over this 12 month period, the fund’s yield dropped from 5% to just over 3% – an astonishing 40% decrease. And yet, the Investment Company Institute (ICI) reports that over that same period Money Market fund assets increased from $2.4 to $3.1 trillion.

The Impact of Inflation on Cash

To make matters worse, inflation is eating away at the long-term value of these cash holdings. With the latest reading of the Consumer Price Index (CPI) at 4%, health care, food, and energy costs are much higher than a year ago. While cash does provide stability and is important for reserve funds, cash now has a negative real return. You can see fairly quickly that if you earn 3% on cash, pay taxes on the interest income, and then subtract an inflation rate of 4%, you now have a negative return of anywhere from 1 to 2% in the purchasing power of your cash.

Maximize those Reserve Fund Returns

With cash holdings generating negative returns in relation to inflation it is more important than ever that you maximize your return on those reserve funds. Having done some research, I’d suggest you at least consider these 2 FDIC-guaranteed banks (needless to say, I have no connection to either of these institutions):

No Minimum:

FNBOdirect.com = 3.25% – First National Bank Omaha

$10,000 Minimum:

WTdirect.com = 3.31% – Wilmington Trust Direct

Listen to the show to hear my thoughts on how this relates to your overall portfolio and my thoughts about investing for the future.

TAGGED WITH: cash, inflation, stock market



Most Recent Episodes

How to Recover From 4 HORRIBLE Financial Mistakes!

In our nearly four decades of combined experience managing money, we’ve seen some horrible financial mistakes - here are the four worst we’ve seen first-hand and what you can do to avoid making a similar mistake. In this episode, you’ll learn: The worst financial...

Why Americans Are Actually Broke! (2023 Edition)

Americans might be bad with money, but you don’t have to be. In this episode, we discuss the underlying reason why Americans are so bad with money and how you can do it better. In this episode, you’ll learn: Common financial pitfalls you should avoid Practical steps...

Build Wealth With the 3 Bucket Strategy! (By Age) 2023 Edition

We believe there are three distinct taxable buckets you have the option of investing in for retirement. We’ll talk about how to balance those buckets by age and show a case study by age that shows what your buckets may look like! In this episode, you’ll learn: The...

Debt Ceiling Crisis: World’s Financial System at Risk?

Should you be worried about the debt ceiling crisis? Although political leaders have so far been unable to come to an agreement, we'll tell you what history says will happen and what it means for your finances. For more information, check out our free resources...

Financial Advisors React to INSANE Money Advice on TikTok!

Is financial advice on TikTok all bad or is there some good advice out there? Check out our brand new TikTok react show where Brian and Bo give their honest reactions to trending financial advice. Enjoy the Show? Sign up for the Financial Order of Operation (FOO)...

How to Save Thousands of Dollars in Taxes in 2024

Tax season is over for most of us, but that doesn’t mean it’s time to stop thinking about your taxes! Planning out your tax strategy in advance can save you time and money on your taxes. In this Q&A, we’ll discuss the line items on your return to pay attention to...

Average 401(k) Balance by Age (2023 Edition)

Are you doing better than the average American at saving in your 401(k)? We'll talk about basics of a 401(k), including new limits, employer matches, and vesting schedules, how many millionaires are created by 401(k)s, and of course the average 401(k) balance by age....

TikTok Products That Are Actually Worth the Money!

TikTok has become not only a popular social media platform, but a popular place to find trending new products. Are any of them actually worth it? Let’s find out!   For more information on how to make the most out of your financial life, check out our free...

The Dark Side of Being an American Millionaire! (2023 Edition)

Being a millionaire isn't always sunshine and rainbows in 2023. In this episode, we'll discuss some common pitfalls and traps millionaires fall into, shock-and-awe stats, and how you can handle your money even better than a millionaire. In this episode, you’ll learn:...