Protecting Purchasing Power of Cash

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ImUrHuckleberry
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Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

We are sitting on $200k in cash from a new home purchase (new build) that fell through due to continual price increases before we could lock the price in. (The builder has been fighting the planning board over the permit for the access road since early last spring. We could not finalize a purchase agreement until the permit was issued, but in the meantime the asking price increased over 40 percent, so we've dropped out on the purchase.)

We still intend to build a new house at some point, but now I'm not sure if it will be in 6 months or in a few years, and in the meantime we are sitting on this cash (dispersed between a savings account and some MM funds) and looking at so called "transitory" inflation eating at it.

How can we protect our purchasing power (as much as possible) without taking too much risk?

Not sure if we should continue to leave it sitting in cash; or if we should consider a short term treasury or TIPS fund; a mix of cash, ST treasuries, ST TIPS; or something else?

Any thoughts?
KlangFool
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Re: Protecting Purchasing Power of Cash

Post by KlangFool »

OP,

The answer is highly dependent on the size of this 200K versus your overall portfolio size excluding this 200K.

A) Is your portfolio = 2 million? 10X 200K?

B) Is your portfolio = 4 million? 20X 200K

I do not buy any house with a 20% down payment that are significant versus my overall portfolio size. Hence, in my case, this 200K would had been insignificant enough for me to keep it in cash.

KlangFool
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dbr
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Re: Protecting Purchasing Power of Cash

Post by dbr »

It may not be possible to get the protection you want. You can buy TIPS bonds or a short TIPS fund, but there is an up front cost right now that cuts the real yield on such investments to about -3%/year on short TIPS even if inflation is offset from there. I don't think there is any mechanism to hedge construction costs and real estate appreciation other than time and luck.
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ImUrHuckleberry
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

KlangFool wrote: Sun Dec 05, 2021 10:45 am OP,

The answer is highly dependent on the size of this 200K versus your overall portfolio size excluding this 200K.

A) Is your portfolio = 2 million? 10X 200K?

B) Is your portfolio = 4 million? 20X 200K

I do not buy any house with a 20% down payment that are significant versus my overall portfolio size. Hence, in my case, this 200K would had been insignificant enough for me to keep it in cash.

KlangFool
I have no idea what my portfolio size has to do with my desire to protect the purchasing power and/or minimize the prospective loss on this money.

I also didn't indicate what percent of a down payment the $200k represents, and again, don't see how it relates to my question.
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JoeRetire
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Re: Protecting Purchasing Power of Cash

Post by JoeRetire »

ImUrHuckleberry wrote: Sun Dec 05, 2021 10:40 am We are sitting on $200k in cash from a new home purchase (new build) that fell through due to continual price increases before we could lock the price in. (The builder has been fighting the planning board over the permit for the access road since early last spring. We could not finalize a purchase agreement until the permit was issued, but in the meantime the asking price increased over 40 percent, so we've dropped out on the purchase.)

We still intend to build a new house at some point, but now I'm not sure if it will be in 6 months or in a few years, and in the meantime we are sitting on this cash (dispersed between a savings account and some MM funds) and looking at so called "transitory" inflation eating at it.

How can we protect our purchasing power (as much as possible) without taking too much risk?
If the price of suitable houses is increasing by over 40 percent in less than a year, you will not be able to protect your purchasing power without taking a lot of risk. How much is "too much" is something only you can decide.

Meanwhile, try to figure out when you will actually try to purchase a house. If it's within a year or two, you'll just need to save more. If it's further out, you can invest and hope for the best.
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ImUrHuckleberry
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

JoeRetire wrote: Sun Dec 05, 2021 10:51 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 10:40 am We are sitting on $200k in cash from a new home purchase (new build) that fell through due to continual price increases before we could lock the price in. (The builder has been fighting the planning board over the permit for the access road since early last spring. We could not finalize a purchase agreement until the permit was issued, but in the meantime the asking price increased over 40 percent, so we've dropped out on the purchase.)

We still intend to build a new house at some point, but now I'm not sure if it will be in 6 months or in a few years, and in the meantime we are sitting on this cash (dispersed between a savings account and some MM funds) and looking at so called "transitory" inflation eating at it.

How can we protect our purchasing power (as much as possible) without taking too much risk?
If the price of suitable houses is increasing by over 40 percent in less than a year, you will not be able to protect your purchasing power without taking a lot of risk. How much is "too much" is something only you can decide.

Meanwhile, try to figure out when you will actually try to purchase a house. If it's within a year or two, you'll just need to save more. If it's further out, you can invest and hope for the best.
Maybe I phrased my question poorly, as I completely understand that I cannot protect against 40 percent inflation. Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Edit: Also, we didn't drop out because we could no longer afford the house. We dropped out because we didn't want to spend that much on that house. But the $200k is just so we can build and move in before we sell our current house and then pay the new house off. So at least we have some protection against inflation with the equity in our current house.
Bubba24
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Re: Protecting Purchasing Power of Cash

Post by Bubba24 »

One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Mike Scott
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Re: Protecting Purchasing Power of Cash

Post by Mike Scott »

You get some random answers because we are all looking for something like this but it does not seem to exist right now. First step is high yield savings at about 0.5%. There is not a clear second step unless you accept some risk or loss of liquidity.
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ImUrHuckleberry
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

Bubba24 wrote: Sun Dec 05, 2021 11:05 am One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Let me try again:

Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Hint: the words minimize and relatively should be a clue for you that my question is not asking the impossible.
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riverant
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Re: Protecting Purchasing Power of Cash

Post by riverant »

ImUrHuckleberry wrote: Sun Dec 05, 2021 11:09 am
Bubba24 wrote: Sun Dec 05, 2021 11:05 am One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Let me try again:

Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Hint: the words minimize and relatively should be a clue for you that my question is not asking the impossible.
At todays inflation rates and interest rates, nothing really exists. Anything that could come close is too volatile (eg stocks) or not liquid (eg ibonds). If you’re not willing to budge on either risk or liquidity, I think unfortunately a high yield savings account is the only solution.
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

TJat wrote: Sun Dec 05, 2021 11:14 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 11:09 am
Bubba24 wrote: Sun Dec 05, 2021 11:05 am One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Let me try again:

Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Hint: the words minimize and relatively should be a clue for you that my question is not asking the impossible.
At todays inflation rates and interest rates, nothing really exists. Anything that could come close is too volatile (eg stocks) or not liquid (eg ibonds). If you’re not willing to budge on either risk or liquidity, I think unfortunately a high yield savings account is the only solution.
I'm willing to take some risk. Not equity type risks, not long term bond type risks, and probably not intermediate term bond risks. I guess I don't know how to figure out the potential downsides of short term bonds enough to understand if I can accept that. And in particular, I don't know how to compare the risk of say a short term TIPS fund versus a short term treasuries fund.
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Re: Protecting Purchasing Power of Cash

Post by KlangFool »

ImUrHuckleberry wrote: Sun Dec 05, 2021 10:51 am
KlangFool wrote: Sun Dec 05, 2021 10:45 am OP,

The answer is highly dependent on the size of this 200K versus your overall portfolio size excluding this 200K.

A) Is your portfolio = 2 million? 10X 200K?

B) Is your portfolio = 4 million? 20X 200K

I do not buy any house with a 20% down payment that are significant versus my overall portfolio size. Hence, in my case, this 200K would had been insignificant enough for me to keep it in cash.

KlangFool
I have no idea what my portfolio size has to do with my desire to protect the purchasing power and/or minimize the prospective loss on this money.

I also didn't indicate what percent of a down payment the $200k represents, and again, don't see how it relates to my question.
ImUrHuckleberry,

Would you care to protect the purchasing power of $100 cash? The obvious answer is no. And, the reason why the answer is no is because $100 is insignificant to you.

And, whether the getting 1% or 2% more on 200K matters to you has to do with your portfolio size. If the portfolio is big enough, it won't matter to you.

I have no problem keeping 100K to 150K cash around earning nothing. My portfolio is big enough for me to do not care about earning 1% to 2% extra on that 100K to 150K.

Everything comes with a cost. There is no sense in spending time and effort on something that are insignificant to you.

KlangFool
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Re: Protecting Purchasing Power of Cash

Post by KlangFool »

ImUrHuckleberry, wrote: Sun Dec 05, 2021 11:19 am
And in particular, I don't know how to compare the risk of say a short term TIPS fund versus a short term treasuries fund.
ImUrHuckleberry,

And, if you don't, is it worth your time and effort to find out?

Keep 200K in a high yield saving account is the best solution. You may gain 1% more in
"a short term TIPS fund versus a short term treasuries fund" at the risk of losing money. Why bother? It is not worth your time and effort.

There are a lot of stuff that are not worth doing when you are rich enough.

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ImUrHuckleberry
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

KlangFool wrote: Sun Dec 05, 2021 11:26 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 10:51 am
KlangFool wrote: Sun Dec 05, 2021 10:45 am OP,

The answer is highly dependent on the size of this 200K versus your overall portfolio size excluding this 200K.

A) Is your portfolio = 2 million? 10X 200K?

B) Is your portfolio = 4 million? 20X 200K

I do not buy any house with a 20% down payment that are significant versus my overall portfolio size. Hence, in my case, this 200K would had been insignificant enough for me to keep it in cash.

KlangFool
I have no idea what my portfolio size has to do with my desire to protect the purchasing power and/or minimize the prospective loss on this money.

I also didn't indicate what percent of a down payment the $200k represents, and again, don't see how it relates to my question.
ImUrHuckleberry,

Would you care to protect the purchasing power of $100 cash? The obvious answer is no. And, the reason why the answer is no is because $100 is insignificant to you.

And, whether the getting 1% or 2% more on 200K matters to you has to do with your portfolio size. If the portfolio is big enough, it won't matter to you.

I have no problem keeping 100K to 150K cash around earning nothing. My portfolio is big enough for me to do not care about earning 1% to 2% extra on that 100K to 150K.

Everything comes with a cost. There is no sense in spending time and effort on something that are insignificant to you.

KlangFool
Congrats on your giant sized portfolio where you have enough that potentially lighting $12,000 on fire annually is of no concern to you. Considering how conservative you seem with the rest of your investment advice, that is a little surprising to me.
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Re: Protecting Purchasing Power of Cash

Post by dbr »

ImUrHuckleberry wrote: Sun Dec 05, 2021 11:19 am
TJat wrote: Sun Dec 05, 2021 11:14 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 11:09 am
Bubba24 wrote: Sun Dec 05, 2021 11:05 am One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Let me try again:

Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Hint: the words minimize and relatively should be a clue for you that my question is not asking the impossible.
At todays inflation rates and interest rates, nothing really exists. Anything that could come close is too volatile (eg stocks) or not liquid (eg ibonds). If you’re not willing to budge on either risk or liquidity, I think unfortunately a high yield savings account is the only solution.
I'm willing to take some risk. Not equity type risks, not long term bond type risks, and probably not intermediate term bond risks. I guess I don't know how to figure out the potential downsides of short term bonds enough to understand if I can accept that. And in particular, I don't know how to compare the risk of say a short term TIPS fund versus a short term treasuries fund.
In investing risk is conventionally taken to mean volatility of the investment, specifically the standard deviation of periodic (annual) returns. It is the range of uncertainty of the actual return around the expected return.

In general risk is the "risk of X" where you have to say what X is. In your case X might be the chances that housing prices will increase faster than the value of your savings and you won't be able to afford the down payment. All fixed income right now does not promise much return even if inflation indexed, so it is unlikely you can overcome the risk that your savings will not pace the price of housing. The risk of TIPS is less than of nominals if we continue to get unexpected inflation and there is continued suppression of interest rates. Probably the most effective way to manage risk of housing prices outrunning someone's resources is to buy sooner rather than later, in the short run. In the long run construction and housing prices may correct eventually and hopeful homeowners will be able to return to the market.
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Re: Protecting Purchasing Power of Cash

Post by KlangFool »

ImUrHuckleberry wrote: Sun Dec 05, 2021 11:32 am
Congrats on your giant sized portfolio where you have enough that potentially lighting $12,000 on fire annually is of no concern to you. Considering how conservative you seem with the rest of your investment advice, that is a little surprising to me.
ImUrHuckleberry,

1) Money is just a tool to be used to live your life. It is a lousy master. It should not be the end goal.

2) Cash is not a dirty word. It is a different kind of asset class from the stock and the bond. Diversification of asset classes is a good thing in the time of future uncertainty.

3) I have enough cash and my portfolio is big enough. I am paying down my mortgage because I have enough.

4) You only need one word to be happy: enough.

5) You only need one word to be unhappy: more.

6) I come from multi-generation business family. We always think of the ROI of our effort. We do not waste time and effort on low ROI stuff.

KlangFool
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BBBob
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Re: Protecting Purchasing Power of Cash

Post by BBBob »

There is a great piece of cognitive bias at play here. A simplified example I recall reading is along the lines that someone would drive much further to save $25 on a $50 purchase than they would to save $25 on a $1000 purchase. Yet it is the same $25 saved!
Last edited by BBBob on Sun Dec 05, 2021 11:47 am, edited 2 times in total.
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ImUrHuckleberry
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

dbr wrote: Sun Dec 05, 2021 11:34 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 11:19 am
TJat wrote: Sun Dec 05, 2021 11:14 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 11:09 am
Bubba24 wrote: Sun Dec 05, 2021 11:05 am One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Let me try again:

Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Hint: the words minimize and relatively should be a clue for you that my question is not asking the impossible.
At todays inflation rates and interest rates, nothing really exists. Anything that could come close is too volatile (eg stocks) or not liquid (eg ibonds). If you’re not willing to budge on either risk or liquidity, I think unfortunately a high yield savings account is the only solution.
I'm willing to take some risk. Not equity type risks, not long term bond type risks, and probably not intermediate term bond risks. I guess I don't know how to figure out the potential downsides of short term bonds enough to understand if I can accept that. And in particular, I don't know how to compare the risk of say a short term TIPS fund versus a short term treasuries fund.
In investing risk is conventionally taken to mean volatility of the investment, specifically the standard deviation of periodic (annual) returns. It is the range of uncertainty of the actual return around the expected return.

In general risk is the "risk of X" where you have to say what X is. In your case X might be the chances that housing prices will increase faster than the value of your savings and you won't be able to afford the down payment. All fixed income right now does not promise much return even if inflation indexed, so it is unlikely you can overcome the risk that your savings will not pace the price of housing. The risk of TIPS is less than of nominals if we continue to get unexpected inflation and there is continued suppression of interest rates. Probably the most effective way to manage risk of housing prices outrunning someone's resources is to buy sooner rather than later, in the short run. In the long run construction and housing prices may correct eventually and hopeful homeowners will be able to return to the market.
Thank you. This is helpful.

From what I understand, at least if what I've read is true, nominal treasuries are (or seem to be) currently priced expecting that the current rates of inflation are transitory. If I bought a short term TIPS fund, it therefore should minimize my losses against inflation if the current rates of inflation prove not to be transitory?

Any way to quantify the prospective difference between a short term TIPS fund versus a short term nominal treasuries fund if the inflation rate in fact proves to be transitory and goes back down to say 2 or 3 percent?
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Re: Protecting Purchasing Power of Cash

Post by dbr »

ImUrHuckleberry wrote: Sun Dec 05, 2021 11:46 am

Thank you. This is helpful.

From what I understand, at least if what I've read is true, nominal treasuries are (or seem to be) currently priced expecting that the current rates of inflation are transitory. If I bought a short term TIPS fund, it therefore should minimize my losses against inflation if the current rates of inflation prove not to be transitory?

Any way to quantify the prospective difference between a short term TIPS fund versus a short term nominal treasuries fund if the inflation rate in fact proves to be transitory and goes back down to say 2 or 3 percent?
There are bond experts out there that probably can estimate such things. For me that issue is down in the weeds and I don't know. I doubt it amounts to much, but there is a lot about how interest rates reflect expectations and I don't know what the expectations are.
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Re: Protecting Purchasing Power of Cash

Post by mpsz »

You can shelter up to $40k in the next 30 days using I Bonds (you mentioned "we", so you each buy $10k now and in January to use up your $10k annual limit). They are currently paying over 7%. However, the downside is that you cannot touch this money at all for 1 year (and there's a 3-month interest loss in the first 5 year). You would also have to open separate TreasuryDirect accounts.

I'm doing that to protect my down payment money. Just make sure that you can work with the 1-year lock up. Would $160k pay the down payment on the house you want, or do you have access to another $40k?
KlangFool wrote: Sun Dec 05, 2021 11:26 am ImUrHuckleberry,

Would you care to protect the purchasing power of $100 cash? The obvious answer is no. And, the reason why the answer is no is because $100 is insignificant to you.

And, whether the getting 1% or 2% more on 200K matters to you has to do with your portfolio size. If the portfolio is big enough, it won't matter to you.

I have no problem keeping 100K to 150K cash around earning nothing. My portfolio is big enough for me to do not care about earning 1% to 2% extra on that 100K to 150K.

Everything comes with a cost. There is no sense in spending time and effort on something that are insignificant to you.

KlangFool
I typically ignore your posts but this one is ridiculous enough to respond.

"Do you care about $100? No? Then why do you care about $200,000?"

We're seeing inflation at or above 5%. That's a purchasing power loss of $10,000 on $200,000. Why not take 2-3 hours to understand what options are available to protect yourself?
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Re: Protecting Purchasing Power of Cash

Post by indexfundfan »

I put some of my cash in Toyota Income Driver notes. Totally liquid, 1.35% APY but has credit risk.
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Re: Protecting Purchasing Power of Cash

Post by LadyGeek »

I removed an off-topic comment. As a reminder, see: General Etiquette
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ImUrHuckleberry
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

mpsz wrote: Sun Dec 05, 2021 11:59 am You can shelter up to $40k in the next 30 days using I Bonds (you mentioned "we", so you each buy $10k now and in January to use up your $10k annual limit). They are currently paying over 7%. However, the downside is that you cannot touch this money at all for 1 year (and there's a 3-month interest loss in the first 5 year). You would also have to open separate TreasuryDirect accounts.

I'm doing that to protect my down payment money. Just make sure that you can work with the 1-year lock up. Would $160k pay the down payment on the house you want, or do you have access to another $40k?
Thank you. We already invested our $20k in I-Bonds for 2021 and we have an additional $20k in cash separate from this $200k ready to invest in January.

I actually don't know how much down payment we will need, but our budget is around $600k, so the $200k is 33 percent of our max. Hopefully that's enough that we can get the new build loan without first selling our existing house. Ideally we want to move into the new house before we sell our current house, and then subsequently pay off the loan on the new one.
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Re: Protecting Purchasing Power of Cash

Post by exodusNH »

ImUrHuckleberry wrote: Sun Dec 05, 2021 11:19 am
TJat wrote: Sun Dec 05, 2021 11:14 am
ImUrHuckleberry wrote: Sun Dec 05, 2021 11:09 am
Bubba24 wrote: Sun Dec 05, 2021 11:05 am One can't keep money "safe" in inflation without risk. Your question asks the impossible.
Let me try again:

Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Hint: the words minimize and relatively should be a clue for you that my question is not asking the impossible.
At todays inflation rates and interest rates, nothing really exists. Anything that could come close is too volatile (eg stocks) or not liquid (eg ibonds). If you’re not willing to budge on either risk or liquidity, I think unfortunately a high yield savings account is the only solution.
I'm willing to take some risk. Not equity type risks, not long term bond type risks, and probably not intermediate term bond risks. I guess I don't know how to figure out the potential downsides of short term bonds enough to understand if I can accept that. And in particular, I don't know how to compare the risk of say a short term TIPS fund versus a short term treasuries fund.
You don't have a lot of good options.

If married, you can get $40k of I Bonds over the next 5 weeks. (You + spouse for 2021 and 2022.) You won't be able to cash them in before 12 months and will lose 90 days of interest if cashed out in less than 5.

Other than that, get a "high yield" savings account. They're paying more than short-term bond funds.

If you're willing to risk ~5%, you could consider BND. That's still losing to inflation right now, but better than 0.5% you can get on savings accounts.

If you're willing to risk 15%, 30/70 VT/BND for the balance wouldn't be a terrible idea.
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Re: Protecting Purchasing Power of Cash

Post by jebmke »

I would put the money back from wherever I took it before deciding to make the buy that never went through. Presumably at that point, your view ahead about buying a house was also uncertain as it is today.
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Re: Protecting Purchasing Power of Cash

Post by ImUrHuckleberry »

jebmke wrote: Sun Dec 05, 2021 12:39 pm I would put the money back from wherever I took it before deciding to make the buy that never went through. Presumably at that point, your view ahead about buying a house was also uncertain as it is today.
Well, before we had no intention of building a new house, and now we do.
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Re: Protecting Purchasing Power of Cash

Post by dknightd »

jebmke wrote: Sun Dec 05, 2021 12:39 pm I would put the money back from wherever I took it before deciding to make the buy that never went through. Presumably at that point, your view ahead about buying a house was also uncertain as it is today.
I agree. You still own a house, which should help keep up with housing costs unless you move to a more expensive area. So, the purchasing power you hope to protect is just the difference between what you have and what you want. You might have to save more money.
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Re: Protecting Purchasing Power of Cash

Post by dbr »

Yes, in fact the actual answer to saving money for a future purpose that is increasing in price is that you have to save more as time goes on to keep up. Of course if you have current income you can do that if you don't spend the money on something else.
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Re: Protecting Purchasing Power of Cash

Post by JoeRetire »

ImUrHuckleberry wrote: Sun Dec 05, 2021 10:57 am Maybe I phrased my question poorly, as I completely understand that I cannot protect against 40 percent inflation. Our goal right now is to minimize our losses against inflation while keeping this $200k liquid and relatively safe.

Edit: Also, we didn't drop out because we could no longer afford the house. We dropped out because we didn't want to spend that much on that house. But the $200k is just so we can build and move in before we sell our current house and then pay the new house off. So at least we have some protection against inflation with the equity in our current house.
I think you hit the nail on the head. If you haven't sold your current house, then the equity there potentially protects you against inflation.
Put the $200k somewhere safe (high yield savings account, CDs, etc). And keep saving.

And try to speed up your decision on your next house, to minimize the risk.

Good luck.
This isn't just my wallet. It's an organizer, a memory and an old friend.
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