The last year or so has been challenging for investors and savers alike. With inflation on the rise and many of the major markets for correction territory, it has been difficult to find a safe place to park cash. Bond yields have been below the rate of inflation and savings accounts have offered pathetic interest rates. Any money held in cash or in bonds has been losing purchasing power in the face of inflation. For real estate investors who often need time to save cash between purchases, this can be a problem.
Luckily, it seems that things are beginning to change. One silver lining to the recent rate hikes is that as the Fed raises its federal funds rate, bond yields and the interest rate paid in money markets and savings accounts tend to rise. . This is exactly what we are seeing. These low-risk assets now offer the potential for real (inflation-adjusted) returns.
Bond yields have fluctuated between 3.5% and 4% in recent months. According to bank feehigh-yield savings and money market accounts now offer between 3.3% and 4.3% as of this writing.
Actual returns vs. nominal
Earning 3.5 – 4% is a decent rate of return for a low-risk asset, but that nominal return (not adjusted for inflation) doesn’t take inflation into account. To truly understand whether these assets are a good fit for investors, we need to look at the “true” rate of return. In this context, “real” means returns adjusted for inflation. For example, if inflation is 7% and a savings account’s nominal rate of return is 4%, then its “real” return is actually -3% (4% – 7% = -3%).
With the most recent inflation rate registering a 6.5% year-on-year growth rate, it may appear that real bond yields and savings rates are still negative, but they may not be. When you read about the Consumer Price Index (CPI), which rose 6.5%, that’s a hindsight measure. It means that prices grew 6.5% from December 2021 to December 2022. It tells us nothing about what will happen next year.
inflation is cooling
Of course, we don’t know what will happen next year, but it is useful to look at CPI increases month by month rather than year by year. Month-by-month data gives us a better idea of what has happened recently and clearly shows a inflation cooling.
Inflation grew steadily from 0.5% to 1.3% per month in the first half of 2022. This is, of course, incredibly high. However, the most recent reading shows that monthly inflation actually decreased by 0.1%. If inflation remains relatively flat (as it has in recent months), the year-over-year reading will be below 1%, well below the Federal Reserve’s target. Compared to a 3.5% interest rate on a high-yield savings account, you would earn 2-3% on your money.
But assuming a flat monthly pace going forward is too optimistic. Instead, let’s average the past two months. If we go back to July 2022, when inflation began to cool, the average monthly inflation rate for those five months was 0.16%. Extrapolate that over a year, and by the end of 2023, we’ll see a year-over-year inflation rate of around 1.9%. This means that you would still earn a real (inflation-adjusted) return of about 1.7% if your money were held in a high-yield savings account.
Even if you think inflation will go up on a monthly basis, say 0.3% a month for the next year, that’s an annual rate of inflation of 3.9%, which is above the Federal Reserve’s target of 2%. It would be similar to the rate of return on a bond or money market account.
Saving makes more sense now than before
Of course, the actual returns we’re talking about aren’t huge, and they certainly won’t build wealth in the long run. But I think this represents an important strategic consideration for investors. For the first time in over a year, investors have a safe place to park cash where they can at least preserve their purchasing power, if not grow modestly. For me, this is vitally important in a complex market like the one we are in.
Over the past year, I have felt a great urgency to invest my money in something to prevent my cash from losing value due to inflation. I wasn’t making bad decisions just to cover inflation, but it felt like a constant struggle to keep up with inflation. Now, I can get a modest real return on my cash, allowing me to be patient and wait for the best opportunities.
Personally, I am still looking to invest in real estate right now. I believe that there will be interesting opportunities in this correction market, but taking advantage of them requires patience and diligence. You can’t buy anything right now. Having a solid place to park cash gives you the potential to earn a real return while you search for the right long-term investments. This is what I intend to do. Save some dry powder in a high yield account and be opportunistic with my real estate investments. It’s an approach I would recommend other investors consider as well.
final thoughts
It is important to note that not all savings accounts are the same. According to my research, the biggest banks in the US, like Chase, Bank of America, and Wells Fargo, still offer terrible interest rates of around 0-0.5%, well below the rate of inflation. . Other banks, such as Barclays, Ally and Marcus, offer between 3.5 and 4%.
So if you’re interested in parking money in a high-yield account, do your due diligence and find a reasonable rate from a reputable bank. There are many resources online that offer comparisons and reviews.
What is your plan for the coming months? Are you still looking to invest? How are you preserving your purchasing power while you wait for your next real estate investment?
Run your numbers like a pro!
Deal analysis is one of the first and most critical steps in real estate investing. Maximize your confidence in every deal with this ultimate first guide to deal analysis. Real Estate by Numbers It makes real estate math easy and makes real estate success inevitable.
BiggerPockets Note: These are opinions written by the author and do not necessarily represent the views of BiggerPockets.
