Recently I sat down with a gentleman who said, “Andrew, I have all this lazy money I don’t know what to do with.” Over a decade, I have heard money called several things –but never lazy. He said, “The truck I bought that pulls my work equipment cost more than my house did 20 years ago.” I said that I understand, but what is “lazy money”? He responded, agitated: “Things keep getting more expensive but my money just has no work ethic”. I could only laugh because he’s right; for most of America we are only treading water with our bank accounts compared to inflation.
Inflation is not a constant, and in recent years we have been blessed with low inflation. As the government utilizes more techniques to keep our economy growing, those tactics tend to cost us in the long run by devaluing our currency. Inflation has averaged 3.12% over the last hundred years.1 [TA1] At first glance that sounds pretty low, until you feel the weight of it over time. Consider how everything you bought today would nearly double in price in 20 years at a rate of 3% inflation.
When you are young, you think low interest rates are fantastic. If you have a son or daughter trying to buy a home, you hope they receive a low interest rate. Yet, when you are retired, low interest rates are terrible because your money grows at a snail’s pace. Initially, you may think: “I wish we were back in the 1980s when interest rates were in the teens.” I always wished that in the 1980s, I could have bought a 100-year CD (if it existed). However, we certainly don’t wish for inflation, especially when it makes buying a home really difficult. With interest rates in the teens, you would pay many times over the purchase price of buying a home.
Here are few ways that could get your money working harder for you:
- Avoid the CD Treadmill – Countless retirees are jumping from one six-month CD to another six-month CD, constantly in pursuit of a higher interest rate. You did not retire to have another part time job researching interest rates on the web. In our office, we refer to CDs as “Certificates of Disappointment” because most of the time you feel disappointed – like you’re running in place. Your money stays busy but it hardly ever makes progress, as if it’s walking on a treadmill going no where. Instead, determine what you really need to stash away for a one-to three year emergency fund, and utilize longer term maturities more efficiently.
- Taxable Accounts – CDs, Money Markets and other taxable accounts are created by you generating income and depositing what is left over in vehicles that pay interest. Taxable accounts require that you pay taxes once you earn the income, and then pay taxes again when the CD earns interest. It feels a lot like paying taxes twice. Instead, consider investments that let you choose when you pay the taxes again. For example, with stocks, you pay taxes on the gains when you sell; real estate when you sell the property; and annuities when you take a disbursement.
- Don’t Flip Extremes – Many investors sit on the sidelines only to get disgruntled when the market is going up. Unfortunately, many take this as a sign to jump back into the market at its peak. Then they come to realize that the music is fading and they are about to be the last ones at the party holding the bill. Instead, it’s a good time to squeeze out more returns. Here’s an easy example to illustrate this point. If I have a client who owns a 2% CD, at maturity we could move it to a 3% paying bond or multi-year guaranteed annuity. With all things being equal, that is a real improvement. If that balance is $300K in extra cash equivalents, a 1% improvement equates to $3,000 more in annual interest.
Benjamin Franklin was right when he said “in this world, nothing can be said to be certain, except death and taxes”.. However inflation is the “silent tax” we never see. It is the silent tax that is imposed by the government when they print more money that devalues our currency. It is the silent tax that slowly whittles a hole in our pockets over time. I encourage you not to keep your money on the sidelines in G.B.S. accounts. We call them GBS because it stands for “Going Broke Safely”. You deserve money that isn’t lazy, but in shape and ready to work for you.
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