March 23, 2023
Over the last 10+ years cash was often referred to as “trash” because no interest was earned in savings account. In 2022, that started changing as the Fed rapidly raised interest rates.
Now many people are keeping money in cash.
A point of clarification. FDIC insured means your account is insured $250,000 per depositor per bank. Recall that when you make a deposit to checking/savings, it becomes a debt of the bank. Viewed another way, the bank owes you the money you deposited whenever you want it. It is a loan from you to the bank. With your deposit, the bank invests the money. This obviously doesn’t always work if there is bank mismanagement e.g. Silicon Valley Bank.
Alternatively, mutual fund money market funds work differently. You deposit money in the fund and short-term government securities are purchased. You are not lending anyone money. If you want your money, you request your money and the fund sells whatever is needed to fulfill your request.
A number of investors are going into mutual fund money market funds because of the high interest being paid instead of investing stocks. The issue to remember is while the interest rates are certainly a nice change, inflation continues to erode the value. The latest inflation number announced March 14 is 6% annualized versus last year. So, for ease of calculation, if your money market fund is paying 4%, your purchasing power is declining at 2% (6 – 4 = 2).
While we continue to advocate having an emergency fund, and earning interest is a great, it is not a substitute for long-term investing whose goal is to grow your money and earn more than inflation.
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