The past year has been challenging for investors and savers alike. With rising inflation and many major markets improvement area, finding a safe place to park the cash has become difficult. Bond yields have been below the rate of inflation, and savings accounts offered pitiful interest rates. Any money held in cash or bonds is losing spending power against inflation. For real estate investors who often need time to save cash between purchases, this can be a problem.
Fortunately, it looks like things are starting to change. The one silver lining to recent rate hikes is that as the Fed raises its federal funds rate, bond yields and the interest rate paid on money markets and savings accounts. That’s exactly what we’re seeing. These low-risk assets now offer the potential to earn real (inflation-adjusted) returns.
Bond yields have fluctuated between 3.5% and 4% over the past several months. According to Bank rateHigh-yield savings and money market accounts are now offering between 3.3% – 4.3% as of this writing.
real vs nominal return
Earnings of 3.5 – 4% are a good rate of return for a low-risk asset, but the nominal (not inflation-adjusted) yield doesn’t factor in inflation. To really understand whether these assets are a good choice for investors, we need to look at the “real” rate of return. In this context, “real” means the inflation-adjusted return. For example, if inflation is 7%, and the nominal rate of return on a savings account is 4%, your “real” return is actually -3% (4% – 7% = -3%).
With the most recent inflation rate registering a 6.5% year-over-year increase, it may seem like the real return on bonds and savings rates are still negative – but that may not be the case. When you read about the Consumer Price Index (CPI) which is up 6.5%, it is a backward looking measure. This means that the prices increased by 6.5% from December 2021 to December 2022. It tells us nothing about what will happen in the coming year.
inflation is cooling down
Of course, we don’t know what will happen in the coming year, but the CPI increases month-to-month rather than year-to-year. Month-by-month data gives us a better idea of what has happened recently and clearly shows that a cooling off inflation,
Inflation steadily increased from 0.5% to 1.3% per month in the first half of 2022. It’s definitely incredibly high. Nevertheless, the most recent reading shows that monthly inflation actually declined by 0.1%. If inflation stays relatively flat (as it has over the past few months), the year-over-year reading will remain below the Fed’s target of 1%. You’ll be earning around 2-3% on your money, compared to the 3.5% interest rate on a high-yield savings account.
But, projecting a flat monthly momentum going forward is overly optimistic. Instead, let’s average the last few months. If we go back to July 2022, when inflation started coming down, the average monthly inflation rate in those five months was 0.16%. Extrapolate this by a year, and at the end of 2023, we would see a year-over-year inflation rate of about 1.9%. This means that if your money was placed in a high-yield savings account, you’d still earn a real (inflation-adjusted) return of about 1.7%.
Even if you assume inflation will be higher on a monthly basis, say 0.3%/month over the coming year, that’s an annual rate of inflation of 3.9%, well above the Fed’s target of 2%. is above. This would also be the case with the rate of return on a bond or money market account.
Saving matters now more than ever
Of course, the real returns we’re talking about aren’t huge and certainly won’t create long-term wealth. But, I think it represents an important strategic consideration for investors. For the first time in more than a year, investors have a safe place to stash cash where they can at least preserve their spending power, albeit not in modest growth. To me, this is vitally important in a complex market that we are in.
Over the past year, I have felt a great need to invest my money Some To avoid my cash losing value to inflation. I wasn’t just making the wrong decisions to prevent inflation, but it felt like a constant scramble to keep up with inflation. Now, I can earn a modest real return on my cash, which allows me to be patient and wait for the best opportunities.
Personally, I still want to invest in real estate. I believe there are going to be interesting opportunities in this perfect market, but it takes patience and diligence to take advantage of them. You can’t buy anything now. Having a solid place to keep cash gives you the ability to earn real returns while looking for the right long-term investments. That’s what I want to do. Keep some dry powder in a high-yield account and be opportunistic with my real estate investments. I would recommend other investors to consider this as well.
final thoughts
It is important to note that not all savings accounts are created equal. According to my research, the largest US banks, such as Chase, Bank of America, and Wells Fargo, are still offering terrible interest rates of around 0% – 0.5%, which is well below the inflation rate. Other banks, such as Barclays, Ellie and Marcus, offer between 3.5 and 4%.
So if you’re interested in putting money into a high-yield account, do your due diligence and get a fair rate from a reputable bank. There are lots of resources online that provide comparisons and reviews.
What are your plans for the next few months? Are you still looking to invest? How are you preserving your spending power while you wait for your next real estate investment?
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
