Beating Inflation
May 16, 2013 5:17 PM   Subscribe

I don't have a lot of debt or expenses, so my income keeps piling up in my checking account. Unfortunately, I don't know much about finance or investment. I want to make sure that I don't lose money year over year because of inflation, but pretty much all the CDs and savings accounts I've seen have an APY lower than the inflation rate (which is >= 1.5% according to various websites). I don't care about playing the stock market; all I want is to avoid losing my money through inaction. How do people in this situation keep up with inflation while at the same time minimizing their financial risk?
posted by archagon to Work & Money (15 answers total) 14 users marked this as a favorite
 
Problem: I intend to use most of my money within the next 2-3 years for personal projects, so I need it to be accessible within that timeframe.
posted by archagon at 5:18 PM on May 16, 2013


Or is what I'm asking impossible? Is it simply illogical to expect an insured investment that beats inflation? I'm not sure how it works.
posted by archagon at 5:21 PM on May 16, 2013


If inflation was higher this might be worth trying to figure out, but given your desire to use the money in the relative short term, there really is no low-risk way for you to try to beat inflation over just a three-year period.
posted by croutonsupafreak at 5:24 PM on May 16, 2013 [2 favorites]


You could invest in TIPS.
posted by MoonOrb at 5:34 PM on May 16, 2013 [2 favorites]


You should learn about Treasury Inflation Protected Securities (TIPS), either as a direct investment or through a mutual fund.
posted by Perplexity at 5:35 PM on May 16, 2013 [1 favorite]


There is no point in hedging against inflation on a 2 year timeframe.
posted by Justinian at 5:55 PM on May 16, 2013 [1 favorite]


Maybe not, but the loss would be on the order of several thousand dollars. Hard to let that go...
posted by archagon at 5:58 PM on May 16, 2013


Over short time frames your gain or loss is too unpredictable. There are easy ways to beat inflation but in 2 years you might find yourself +/- 5% very easily. Something with a guaranteed return in the short term is probably for the best if you want the money soon (such as CDs, short term bonds, etc)
posted by RustyBrooks at 6:03 PM on May 16, 2013


Short term TIPS have a negative real yield now, meaning they are guaranteed to lose real value over the next few years.

Unfortunately there are no low risk, short term investments that will guarantee a return after inflation. That's just the way it is in a depressed economy. Your best bet are two or three year CDs at an on line bank, FDIC insured.

If you want the possibility of a higher return, you are going to have to take more risk and that generally means putting at least some of your investment in equities, preferably a no-load index fund.
posted by JackFlash at 6:05 PM on May 16, 2013 [1 favorite]


Zvi Bodie, a Boston University professor specializing in pension finance, believes that you should consider I Bonds via TreasuryDirect. However, they are limited to $10k per Social Security number per year, and it sounds like you have more than that.
posted by drdanger at 6:52 PM on May 16, 2013


archagon: On the time frame you're talking about virtually any investment will fluctuate more than inflation, so you're risking losing 10% to hedge against 2%.
posted by Justinian at 7:00 PM on May 16, 2013


Justinian: True for most investments, but the rising rate scenario that would cause TIPS to suffer a capital loss is not a problem for I Bonds because they're puttable to the Treasury at par plus (all but three months of) accrued interest. There are also tax advantages. Bogleheads has a nice comparison of TIPS and I Bonds.
posted by drdanger at 7:44 PM on May 16, 2013


True. But as you indicate, if OP is concerned about leaving thousands of dollars on the table due two two years inflation he has to be speaking on the order of $200k or so.
posted by Justinian at 8:01 PM on May 16, 2013


TIPS would hedge "inflation" in a theoretical sense, but what it really does is protect you against the change in price of a basket of goods used by a hypothetical urban consumer. Your personal consumption and exposure over the next two year probably looks *nothing* like that, so you won't have actually hedged your personal consumption and how much you, individually, are going to gain or lose from change in prices.

If you're planning on spending at least 100k on individual projects over the next 2-3 years, I'd suggest you look for ways to hedge any costs associated with that, since it seems like changes in those price levels are going to be a lot more meaningful to your bottom line than generic inflation changes.

One thing--there aren't any real good options here beyond inflation-linked bonds, but there are thousands of bad ones given your time horizon (gold, commodities, real estate, FX, etc). Don't do those.
posted by limagringo at 3:10 AM on May 17, 2013 [2 favorites]


Have you considered looking for a new bank? Some small banks looking to increase their cash flow offer a 2-4% interest rate on e-checking accounts, for up to $25k, as long as you have a direct deposit and a certain number of debit card transactions per month. That's a better return than a CD (0.5 -1% roughly right now), and it is guaranteed.

I've found this to be true in 2 or 3 towns I have recently lived in in the northeast and the south.
posted by jilloftrades at 5:23 AM on May 17, 2013


« Older Help me price my art.   |   Name This Disease: What Congenital Heart Defect? Newer »
This thread is closed to new comments.