Savings Conundrum

The present low-interest environment is a major challenge for folks with idle cash on hand. If you're saving for a near-term financial goal (within the next 2 years) such as a down payment on your first home or a sabbatical or grad school, there's no easy way to protect this bucket of money.

Inflation is creeping higher which gradually erodes the purchasing power of your savings. Historically, you could park your nest egg in a high-yield savings account and at least keep pace with inflation but those days are gone.

Inflation-protected securities (TIPS) have always been a favorite of mine...low risk, liquid, and kicking off enough interest to be on par with inflation. However, even yields on TIPS is a measly 1.83 percent against inflation of 3 percent. After three years your nest egg is worth 1.17 percent less than when you started.

Taking on a bit more risk, offers a bit more return. You could trade out the TIPS ETF for a corporate bond ETF with a slightly higher yield of perhaps 2.2 percent. Not very compelling.

Finally, there's stocks. Riskier and potentially more rewarding. If you keep your savings allocated to cash, you may find an opening when/if the market drops from it's current all-time highs. Strategically 'keeping your powder dry' could provide a chance to capitalize on growth when the time comes. But this is a nail biter for some people who aren't interested in gambling with their savings.

It all comes down to risk-tolerance: if losing a little of the value to inflation is okay in return for the safety of cash, that's okay! If the idea of high inflation upsets your apple cart, then be ready to take some risk to protect your principal.


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