Brandy Auterson:
It’s now time for 4 Your Money. We’re joined by James Nelson, financial advisor at NelsonCorp Wealth Management. Great to see you, James.
James Nelson:
Thanks, Brandy.
Brandy Auterson:
So inflation and interest rates continue to drive financial markets. Now beyond those immediate impacts, how should viewers be thinking about these forces?
James Nelson:
Yeah, the recent shift in monetary policy has made a mark on financial assets, for sure. One less obvious impact has been on spending power. One way to gauge this is to look at real interest rates of cash investments, like treasury bills, and we’ve got a chart here that illustrates this. And we’ve shown this chart before, but I think it’s worth revisiting with the current inflation numbers. The blue line at the top is the current real cash rate, all the way on the far right-hand side. It is calculated by subtracting the consumer price inflation from the 3-Month Treasury Bill Rate. Currently it’s at negative 7.5%, the lowest level since 1920s. That means that you’re basically losing seven and a half percent of your purchasing power in a year. The bottom line there, the red, shows the cumulative effect of this time, showing the peaks and troughs holding cash and considering the impact inflation. Since 2000, holding cash has generated 19% decline in real returns, so I guess what this chart really shows is that holding cash sounds like a safe investment, but it’s not always the safest.
Brandy Auterson:
So I know you work with a lot of retirees. How does this impact individuals’ plans in retirement?
James Nelson:
People tend to think a dollar in the bank is a dollar today and it’ll be a dollar into the future, and that’s really not the case. We really have to watch out for inflation and it’s certainly chewing away at people right now.
Brandy Auterson:
If you missed any of our discussion, we’ll make it available for you on OurQuadCities.com.