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Beyond Bank Accounts

ArticleSanjib Saha  |  Jun 13, 2026

I OPENED MY FIRST bank account in the US at a local credit union (CU) close to my workplace. The CU had several convenient offers for employees of our company. With minimal effort, I opened checking and savings accounts, got free checkbooks and a credit card despite having no credit history in the US.

I was so pleased with the convenience that I handled all my banking needs through this CU for many years. That included direct deposit of my salary, payments and withdrawals, a car loan, and certificates of deposit (CDs) as my savings grew. I still maintain my checking account here and occasionally enjoy special favors as a longtime loyal customer.

Eventually, I realized that I earned very little interest from the bank deposits. I shopped around, found other banks with better rates, opened several accounts here and there, and moved my money around.

I felt good about being proactive and getting a better return on my cash reserve. But that feeling was short-lived as I started learning more about personal finance and investments. Tired of chasing yields in bank accounts, I eventually embraced US Treasurys (debt issued and backed by the US Government) as my alternative to savings accounts and CDs.

For those unfamiliar with US Treasurys, think of them as CDs with maturities ranging from four weeks to 30 years. They're widely used as a "safe investment" by individual, institutional and even sovereign investors around the world.

There are some key differences, though. Bank deposits are insured only up to $250,000. US Treasurys, on the other hand, are backed by the full faith and credit of the US Government. Therefore, there is virtually no default risk regardless of the investment amount.

Treasury interest rates, both short-term and long-term, are heavily influenced by monetary policy actions of the US Federal Reserve (Fed). Treasury interest rates directly affect many interest rates we encounter in everyday life: bank accounts, CDs, mortgage, car loans, personal and business loans, and so on.

Treasury interest rates are often higher than comparable bank products. Why? Because the intermediary financial institutions take their cut for operational costs and profits. Result? Suboptimal, or sometimes almost non-existent, interest on bank deposits.

But wait. What if I need my money back?

With bank deposits, I can walk in and withdraw cash from my account. If my money is locked in a CD, I may have to pay a penalty for early withdrawal, but I can still access it fairly quickly. What happens if I'm holding Treasurys? Do I need to wait until maturity?

That leads us to another important aspect of US Treasurys: their extremely high liquidity.

I can certainly buy newly issued Treasurys and wait until maturity, but I don't have to wait for these events. Investors around the world buy and sell Treasurys in the open market every day, making them one of the most liquid investments in existence.

Their liquidity, safety and meaningful return make Treasurys a compelling alternative for both short- and long-term cash reserves.

Sounds interesting? That's exactly how I felt after doing my own research. All I needed to figure out was the best way to invest in them.

Instead of buying Treasurys directly from the US Treasury, I use my brokerage accounts and buy and sell individual Treasurys or Treasury exchange-traded funds (ETFs) in the open market, just like stocks or funds. (I used to participate in Treasury auctions through the brokerage account to buy new issues and set my holdings to auto-roll upon maturity, but I eventually stopped doing that to keep things simple.)

For annual expenses and short-term cash needs, I like short-term, highly liquid, Treasury ETFs with a practically negligible expense ratio.

For money expected in three to four years, I favor short- and intermediate-term Treasury Inflation Protected Securities (TIPS) ETFs. TIPS have a lower interest rate compared to equivalent regular Treasurys, but their principal is adjusted with inflation, helping mitigate the risk of unexpected inflation.

For cash reserves further into the future, five years or more, my preference is a ladder of individual TIPS bonds, each maturing in a specific future year. Bond trading is slightly more involved than ETFs or stocks, so target-maturity TIPS ETFs can also be a reasonable alternative despite their slightly higher management fees.

Is there a catch compared to keeping money in conventional bank accounts?

I can't think of any, but there are two noticeable differences worth understanding.

First, unlike money sitting in bank accounts, Treasury investments fluctuate in value because they constantly change hands in open markets. For short-term Treasurys, the fluctuations are usually tiny. For intermediate- and long-term Treasurys, the swing can be more noticeable, especially when there's a major change in the interest rate expectation. Thankfully, these fluctuations are usually modest, and over time Treasurys often come out ahead compared to bank deposits.

The second difference deserves a bit more attention.

With a bank account, you can get hold of your money almost immediately. Treasury investments, however, may take a couple of business days to turn into spendable cash. You need to sell the ETF or bond during market hours. Once the transaction settles, usually the next business day, the proceeds can then be transferred out to the checking account for spending. In some cases, you may be able to carry on your spending activities directly from the brokerage account.

Over time, I shifted most of my liquid savings to Treasurys because of the improved result. Yet I still see many people leaving large cash balances in bank products or chasing yields from one bank to another.

I suspect the main reason is simple: lack of familiarity with US Treasurys.

  Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.
Read more »

Feeling TIPSy?

ArticleSanjib Saha  |  Aug 22, 2026

NOT TOO LONG ago, Treasury Inflation Protected Security (TIPS) was a relatively obscure investment for safe long-term fixed-income investments. For the first twenty years of the new century, consumer prices were mostly stable or rising at a too-slow-to-notice rate. Why bother with anything related to inflation? Sadly, persistently low inflation made us complacent on the biggest long-term risk of bond investments -- the insidious unexpected inflation that robs us of the purchasing power of our “safe” investments. Yes, let’s not forget that the biggest risk of bond or bond-like investments is unexpected inflation. Any bond or CD with a maturity beyond a few years must either offer a sufficiently high interest rate to compensate for sudden bouts of inflation, or have its principal adjusted for the inflation actually realized. The former is nearly impossible to find without sacrificing safety. The latter is what TIPS is for. To be clear, the market and investors always expect some level of inflation. Therefore, a bond’s effective interest rate - measured by its YTM (Yield to Maturity) - must be high enough to not only compensate for “expected” inflation and the uncertainties around it but also provide a meaningful increase in the purchasing power of the original principal.  A concrete example might help. Consider a 10-year US Treasury nominal bond with a face value of $1,000, selling at $1,000 and paying 5% annual interest. The interest rate reflects the expectations about inflation and other factors over the next 10 years. The rate would be lower if market expected lower inflation, and higher if market expected the opposite. The omnipresence of inflation means we’re likely to lose some purchasing power when we get our $1,000 in 10 years. It won’t buy what $1,000 buys today. By how much? That’s the thousand dollars question (pun intended).  There isn’t a readily available number that explains why that 10-year Treasury Bond yields 5% instead of 3% or 7%. Investors essentially take a leap of faith that annual inflation stays low enough over the 10-year period for the interim interests to compensate for the purchasing power loss, plus some changes. Most of us are perfectly comfortable assuming that inflation won’t be as high as 5% for 10 years. But are we fooling ourselves? I suggest using an inflation calculator to see for ourselves. Spoiler alert: Late 1960s through early 1980s can be an eye-opening period. How’d we feel if the next 10 years turn out to be something similar? Think about how you might feel when you safekeep your money in a so-called secure investment, give up higher returns available from risky investments, and then encounter an inflationary regime. Your minimum expectation was that your purchasing power would remain intact and perhaps improve a little by the time your bond matures. Instead, unforeseen inflation erodes your purchasing power and compromises the financial goal the fund was supposed to cover.  Your “safe” investment fails you completely. You realize that it wasn’t safe at all.  If unexpected inflation is so devastating, why are we so lax about it?  I can think of two reasons.  First, our minds haven’t adapted to the reality that, unlike to a “real” asset like a bag of rice or a gallon of gasoline, money in its current form is inherently self-eroding. It slowly loses its worth over time. A hundred dollars sitting around will still be a hundred dollars next year, but it won’t buy the same amount. We don’t intuitively perceive the continuous loss of purchasing power. Even when we do internalize it with some effort, we get used to the “pace” of the loss. In other words, we view inflation as steady and unexpected inflation as highly unlikely. Alas, all it takes is a single prolonged inflationary period to change that perception. By then, however, the damage to existing fixed income investments may already be done. Frankly, I’d be very wary of keeping my long-term “safe” money -- fund that I need to preserve beyond a three-year horizon - in any form that isn’t protected against unexpected inflation. For bond investments, the most meaningful option would be TIPS. Why? Because, in addition to being secured by the full faith and credit of the US Government just like any other Treasury securities, TIPS provides three important assurances upfront. First, it provides protection against unexpected inflation, which is a realized inflation that differs from what we expected when purchasing it. If the actual inflation averages 12% instead of the expected 2%, the principal is automatically adjusted to reflect the actual inflation. No guesswork or unexpected risk involved. Second, it provides a “real interest rate” upfront that tells us how much the purchasing power of the investment will increase over time, regardless of what the actual inflation turns out to be. Buying a 10-year TIPS with real 2% annual interest means the investment’s purchasing power will grow 2% per year over the holding period, before considering taxes and other factors. The third aspect is more nuanced. It involves the possibility of inflation being lower than expected, or even negative inflation (aka deflation). Let me elaborate. If a regular nominal 10-year Treasury Bond offers 5% annual yield and an equivalent TIPS offers a real annual interest rate of 2.75%, the market-implied inflation, the breakeven inflation rate, is roughly 2.25% (5% minus 2.75%). Actual inflation, of course, will be known only after 10 years when the bond matures. Suppose the actual inflation turns out to be only 1.25%. The nominal Bond investor would end up with more purchasing power than the TIPS investor because the TIPS principle would be adjusted by only the actual 1.25% inflation rate.  The primary objective of the TIPS investor would still have been met: preserving and improving purchasing power by about 2.75% annually. But there would be a “missed opportunity”. The nominal Treasury investor would end up with even greater purchasing power. Does it mean that a TIPS investor can face an unlimited opportunity cost if inflation turns out to be negative? What happens if the actual inflation is, hypothetically speaking, negative 5%, in a severely deflationary period? Does the TIPS investor get back proportionately reduced principal at maturity? Thanks to the third assurance of TIPS, the answer is NO.  TIPS guarantees that the principal returned at maturity will never fall below the original face value. During periods of deflation, the inflation-adjusted principal can fall below its face value and the interim interest payments will decline accordingly. But at maturity, the principal is floored at the original principal amount. Therefore, the breakeven inflation rate, the difference between the yield of a nominal Treasury bond and the real yield of an equivalent TIPS, represents the maximum annual yield advantage that the nominal bond can have over TIPS in an unexpectedly low inflation regime.  To summarize, a TIPS investor gets unlimited protection against unexpectedly high inflation, while accepting a limited opportunity cost should the actual inflation be low or even negative. The magnitude of that trade-off is reflected in the breakeven inflation rate at the time of the TIPS purchase.  An aside: given the destructive impact of deflation on economy and society, policy makers are generally more concerned about preventing prolonged deflation than about preventing modest inflation. Therefore, prolonged deflation is usually considered less likely. Still, we cannot ignore deflation risk altogether and should be prepared for the possibility that TIPS can underperform a nominal bond if inflation runs low.  Therefore, the decision to favor TIPS over an equivalent nominal Bond hinges in part on the current breakeven inflation rate. If it’s low enough, favoring TIPS can be an easy decision. Getting unlimited protection against unexpectedly high inflation is worth accepting the relatively small opportunity cost if inflation comes below the breakeven rate. There is, however, a cautionary note about buying TIPS bonds in the secondary market, especially older issues. Consider a 30-year TIPS bond issued 20 years ago and a 10-year TIPS issued within last 6 months. Both might appear to be valid choices if they mature within a few months of each other and offer similar yields. But beneath the surface, one may be more favorable than the other.  The older TIPS will likely have a much higher inflation-adjusted principal because it accumulated 20 years of inflation adjustments. But the protection against unexpected deflation applies only to the bond’s original face value, which is typically $1,000.  In a prolonged deflationary period, the older bond has much more room for its inflation-adjusted principal to decline before reaching the $1,000 floor. The newer issue, whose adjusted principal is much closer to the $1,000 face value, has less exposure to this risk. Therefore, all else being equal, I’d favor a TIPS with a low inflation-adjusted factor when buying in the secondary market. All things considered, my vote goes to TIPS for long-term “safe” investments, provided the break-even inflation is reasonably low. For secondary market purchases, however, a high inflation-adjustment factor would give me pause.   Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.
Read more »

Tax Complications – How SS Benefits interact with Other Income

Rick Connor  |  Aug 18, 2026

"Rick: Thank you for your community service with AARP Tax-Aide. I encourage other Humble Dollar readers to volunteer their time in whatever manner suits them."
- Hall Plante
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Federal debt

R Quinn  |  Aug 19, 2026

"As long as the people who run the show keep thinking the way to get out of debt is to cut income it is going to get exponentially worse."
- Kenn Garner
Read more »

The Intentional Spendthrift

Mark Crothers  |  Aug 21, 2026

"Mark - first of all, I've missed your posts. Glad you're still here. Second, my trip to Spain 3 years ago was an excellent introduction to the "house red" wine wherever I went. It was fabulous. I have no idea what it cost, but it was probably less than your brandy!"
- Jeff Bond
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Reaching Two-thirds of a Century!

Rick Connor  |  Sep 3, 2024

"Thanks Jack. He is now a very smart 13 year old."
- Rick Connor
Read more »

$40 Trillion of Debt

ArticleAdam M. Grossman  |  Aug 22, 2026

SOME MILESTONES are auspicious. Others are not. This week, the Treasury announced that the federal government’s debt had topped $40 trillion for the first time. Government debt is nothing new, but the problem is now of more concern, for two reasons. First, the scale has grown. An apples-to-apples way to look at the government’s debt load is to compare it to GDP—the economy’s total annual output. On this basis, outstanding debt now exceeds 100% of GDP, a level we haven’t seen since the period immediately after World War II. That brings us to the second concern: If the government isn’t able to balance its books while the economy is strong, as it is today, lawmakers will have less flexibility to act when the next recession occurs. For a brief period about five years ago, a theory known as modern monetary policy entered the conversation. The idea, popularized by a book titled The Deficit Myth, was that we shouldn’t be so concerned with deficits—that the U.S. government should be able to borrow more or less as much as it wants. What we’ve seen, though, is that eventually deficits do matter. In simple terms, the government now takes in about $6 trillion per year in revenue, but it's spending almost $8 trillion, resulting in deficits of roughly $2 trillion. And just like a consumer who's run up a big credit card bill, interest payments now consume an ever-larger portion of annual spending. In round numbers, the government this year will spend about one in every six tax dollars it collects on interest and will spend more on interest than on defense. Why have the numbers gotten so much worse? The first factor was Covid. The government had to take extraordinary measures to pull the economy out of recession. But while that spending was mostly justified, the problem is that Congress grew accustomed to larger budget shortfalls and has been unwilling to rein things back in. Congress, in fact, went in the opposite direction when it passed a set of tax cuts a few years back. Those cuts might not have been such a problem, except that one of the lasting effects of the pandemic was inflation. It hit a high near 10% in 2022, and while it’s come down from that peak, it's still higher than it was prior to 2020. What’s the connection between inflation and the deficit? It’s more indirect, but it may be the government's biggest problem at this point. The Federal Reserve's primary strategy in fighting inflation is to raise interest rates, and that's exactly what it did beginning in 2022. That helped with inflation but became a problem for the deficit because the government is such a large borrower, and higher interest rates translated to higher borrowing costs. Unfortunately, the issue has now started to compound on itself. Despite the Fed’s lowering rates, which it has done a handful of times over the past few years, market interest rates have remained stubbornly high, especially long-term rates. That’s because the government is being forced to pay more to borrow, just like any prospective borrower whose finances look shaky. This has become something of a chicken-or-the-egg problem. If rates were lower, the deficit might shrink considerably. But rates may not drop until investors see that lawmakers have gotten serious about the issue.  Why hasn’t Congress addressed the problem? In short, it’s because the two most obvious solutions—raising taxes or cutting spending—are the last thing any politician wants to do. Ironically, this may be the one area where both parties are fully aligned. Hopefully Washington begins to get serious about the problem. For better or worse, though, this is the situation we’re in. Against this backdrop, what steps might you consider for your portfolio? Because the deficit is so closely tied to interest rates, the first area I’d focus on would be your bond holdings. With long-term interest rates at multi-decade highs, there might appear to be an opportunity to profit from long-term bonds if rates were to drop. I would be cautious, though. Just this week, we’ve seen volatility in long-term rates, and things could easily go the other way. For that reason, I recommend a conservative posture toward bonds, with the majority in short-term holdings, only a small amount in intermediate-term and none at all in long-term bonds. To be sure, this might mean forgoing some profits if rates come down, but in my view, the bond side of a portfolio should be the part that helps investors sleep at night rather than another area to worry about. What other steps could you take? I’d give thought to your long-term tax exposure. It’s possible that politicians will eventually get serious and raise taxes, and if they do, you’d want to be in a position to manage your own tax bill. Fortunately, there is one clear route to inoculating part of your portfolio against tax increases, and that’s to look for ways to build up dollars in a Roth account: If you’re in your working years, you could contribute to a Roth IRA or a Roth 401(k). Your employer might even allow for so-called mega back-door Roth contributions. If you’re retired or happen to have a low-income year, consider a Roth conversion.  A final recommendation: If you have a net worth over $10 million or so, you might give thought to estate tax strategies. Today the federal estate tax applies only to individuals with more than $15 million in assets, but this threshold has been a political football and could easily end up much lower. As recently as 2008, it was at just $2 million. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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New in 2025 – Code Y on 1099-R box 7 for QCD’s

William Perry  |  Apr 26, 2025

"Here is a link to the 2026 draft 1099-R instructions dated Jun 17, 2026 wherein the IRS writes, on a preliminary basis, the following - ...unexpected issues occasionally arise, or legislation is passed—in this case, we will post a new draft of the form to alert users that changes were made to the previously posted draft... Code Y for box 7a on Form 1099-R. We added code “Y” to the list of codes for box 7a to identify a qualified charitable distribution (QCD). See Qualified charitable distributions (QCDs), later. For tax year 2026, the use of code Y to report a QCD is optional. If you are completing and filing a 2026 Form 1099-R, you may choose, but are not required, to enter code Y in box 7a. It is difficult to provide timely, clear and objective guidance when the agency who interprets the laws passed by congress and writes the detailed regulations have not finalized their rules for the tax year we are more than halfway through. My intent in this updated post was to encourage using a direct from IRA custodian to charity method for those who are making qualified distributions to avoid potential tax compliance headache for you and your tax preparer. I do not have any idea if your broker will choose to use code "Y" regardless of the method of how the QCD is distributed."
- William Perry
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TreasuryDirect changing login procedure to mandate ID.me later in 2026

William Perry  |  Aug 15, 2026

"I actually tried redeeming my U.S. EE Savings Bonds at several local banks two years ago. None of them will accept them anymore. They all referred me back to Treasury Direct as the only option. I still haven't completed that conversion process."
- Frank McIntire
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The Federal Debt and Social Security Payments

DavidHLancaster  |  Aug 19, 2026

"Some really good thoughts here. I was pondering this topic after reading a WSJ article on the deficit. My conclusion:the typical representation of huge deficits generated from Social Security and Medicare ignores revenue from employers, employees and taxation of SS."
- Harold Tynes
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If Retirement  is Getting Close

Dan Smith  |  Aug 18, 2026

"This way that extra distribution above the RMD will be tax-free to her heirs instead of taxed as ordinary income."
- Randy Dobkin
Read more »

Simplicity Is a Virtue

ArticleDavid Gartland  |  Feb 4, 2025

FORD MOTOR COMPANY introduced the world to the convertible hard top in 1957 with a car called the Skyliner. It was a marvel of engineering.

To retract, the Skyliner hard top first tilted up and away from the front windshield. Then the top folded in half overhead. The trunk lid opened wide. The folded hard top swung into the trunk, which then closed. All by flipping a single dashboard switch. You can see it in operation in this commercial featuring Lucille Ball and Desi Arnaz.

To make this contraption work, Ford engineers installed seven electric motors, four jack lifts, 10 limit switches, 10 solenoids, four locking mechanisms for the roof, two locking mechanisms for the trunk and 610 feet of wire. It's hugely complicated—and difficult to repair.

I’ve never been a fan of complicated. This applies to investing as well as cars. My introduction to investing came from opening a savings account at my local bank when I was a kid. With time, I could see how my money grew in value if I just left it alone. Simple.

For years, I invested in either savings accounts or certificates of deposit. It wasn’t until I worked for a company with a 401(k) plan administered by Vanguard Group that I dove into the stock market. I chose a one-stop shopping 60% stock-40% bond balanced fund. I contributed an amount that I felt comfortable losing, should things go badly wrong. I knew I had cash in the bank to cover whatever surprises might arise.

I’m sure many others enjoy deciding when, where and how they’re going to invest next. Yet everything that I’ve read tells me the key isn’t timing the market, but time in the market. Just invest and wait patiently.

I keep in mind the old saying, “A watched pot never boils.” Just forget about it until you need the money. Then look up your balance.

Could I have done better with a more complicated investment approach? Maybe. But who cares? As long as I have money in the bank, I’m good.

Read more »

Beyond Bank Accounts

ArticleSanjib Saha  |  Jun 13, 2026

I OPENED MY FIRST bank account in the US at a local credit union (CU) close to my workplace. The CU had several convenient offers for employees of our company. With minimal effort, I opened checking and savings accounts, got free checkbooks and a credit card despite having no credit history in the US.

I was so pleased with the convenience that I handled all my banking needs through this CU for many years. That included direct deposit of my salary, payments and withdrawals, a car loan, and certificates of deposit (CDs) as my savings grew. I still maintain my checking account here and occasionally enjoy special favors as a longtime loyal customer.

Eventually, I realized that I earned very little interest from the bank deposits. I shopped around, found other banks with better rates, opened several accounts here and there, and moved my money around.

I felt good about being proactive and getting a better return on my cash reserve. But that feeling was short-lived as I started learning more about personal finance and investments. Tired of chasing yields in bank accounts, I eventually embraced US Treasurys (debt issued and backed by the US Government) as my alternative to savings accounts and CDs.

For those unfamiliar with US Treasurys, think of them as CDs with maturities ranging from four weeks to 30 years. They're widely used as a "safe investment" by individual, institutional and even sovereign investors around the world.

There are some key differences, though. Bank deposits are insured only up to $250,000. US Treasurys, on the other hand, are backed by the full faith and credit of the US Government. Therefore, there is virtually no default risk regardless of the investment amount.

Treasury interest rates, both short-term and long-term, are heavily influenced by monetary policy actions of the US Federal Reserve (Fed). Treasury interest rates directly affect many interest rates we encounter in everyday life: bank accounts, CDs, mortgage, car loans, personal and business loans, and so on.

Treasury interest rates are often higher than comparable bank products. Why? Because the intermediary financial institutions take their cut for operational costs and profits. Result? Suboptimal, or sometimes almost non-existent, interest on bank deposits.

But wait. What if I need my money back?

With bank deposits, I can walk in and withdraw cash from my account. If my money is locked in a CD, I may have to pay a penalty for early withdrawal, but I can still access it fairly quickly. What happens if I'm holding Treasurys? Do I need to wait until maturity?

That leads us to another important aspect of US Treasurys: their extremely high liquidity.

I can certainly buy newly issued Treasurys and wait until maturity, but I don't have to wait for these events. Investors around the world buy and sell Treasurys in the open market every day, making them one of the most liquid investments in existence.

Their liquidity, safety and meaningful return make Treasurys a compelling alternative for both short- and long-term cash reserves.

Sounds interesting? That's exactly how I felt after doing my own research. All I needed to figure out was the best way to invest in them.

Instead of buying Treasurys directly from the US Treasury, I use my brokerage accounts and buy and sell individual Treasurys or Treasury exchange-traded funds (ETFs) in the open market, just like stocks or funds. (I used to participate in Treasury auctions through the brokerage account to buy new issues and set my holdings to auto-roll upon maturity, but I eventually stopped doing that to keep things simple.)

For annual expenses and short-term cash needs, I like short-term, highly liquid, Treasury ETFs with a practically negligible expense ratio.

For money expected in three to four years, I favor short- and intermediate-term Treasury Inflation Protected Securities (TIPS) ETFs. TIPS have a lower interest rate compared to equivalent regular Treasurys, but their principal is adjusted with inflation, helping mitigate the risk of unexpected inflation.

For cash reserves further into the future, five years or more, my preference is a ladder of individual TIPS bonds, each maturing in a specific future year. Bond trading is slightly more involved than ETFs or stocks, so target-maturity TIPS ETFs can also be a reasonable alternative despite their slightly higher management fees.

Is there a catch compared to keeping money in conventional bank accounts?

I can't think of any, but there are two noticeable differences worth understanding.

First, unlike money sitting in bank accounts, Treasury investments fluctuate in value because they constantly change hands in open markets. For short-term Treasurys, the fluctuations are usually tiny. For intermediate- and long-term Treasurys, the swing can be more noticeable, especially when there's a major change in the interest rate expectation. Thankfully, these fluctuations are usually modest, and over time Treasurys often come out ahead compared to bank deposits.

The second difference deserves a bit more attention.

With a bank account, you can get hold of your money almost immediately. Treasury investments, however, may take a couple of business days to turn into spendable cash. You need to sell the ETF or bond during market hours. Once the transaction settles, usually the next business day, the proceeds can then be transferred out to the checking account for spending. In some cases, you may be able to carry on your spending activities directly from the brokerage account.

Over time, I shifted most of my liquid savings to Treasurys because of the improved result. Yet I still see many people leaving large cash balances in bank products or chasing yields from one bank to another.

I suspect the main reason is simple: lack of familiarity with US Treasurys.

  Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.
Read more »

Feeling TIPSy?

ArticleSanjib Saha  |  Aug 22, 2026

NOT TOO LONG ago, Treasury Inflation Protected Security (TIPS) was a relatively obscure investment for safe long-term fixed-income investments. For the first twenty years of the new century, consumer prices were mostly stable or rising at a too-slow-to-notice rate. Why bother with anything related to inflation? Sadly, persistently low inflation made us complacent on the biggest long-term risk of bond investments -- the insidious unexpected inflation that robs us of the purchasing power of our “safe” investments. Yes, let’s not forget that the biggest risk of bond or bond-like investments is unexpected inflation. Any bond or CD with a maturity beyond a few years must either offer a sufficiently high interest rate to compensate for sudden bouts of inflation, or have its principal adjusted for the inflation actually realized. The former is nearly impossible to find without sacrificing safety. The latter is what TIPS is for. To be clear, the market and investors always expect some level of inflation. Therefore, a bond’s effective interest rate - measured by its YTM (Yield to Maturity) - must be high enough to not only compensate for “expected” inflation and the uncertainties around it but also provide a meaningful increase in the purchasing power of the original principal.  A concrete example might help. Consider a 10-year US Treasury nominal bond with a face value of $1,000, selling at $1,000 and paying 5% annual interest. The interest rate reflects the expectations about inflation and other factors over the next 10 years. The rate would be lower if market expected lower inflation, and higher if market expected the opposite. The omnipresence of inflation means we’re likely to lose some purchasing power when we get our $1,000 in 10 years. It won’t buy what $1,000 buys today. By how much? That’s the thousand dollars question (pun intended).  There isn’t a readily available number that explains why that 10-year Treasury Bond yields 5% instead of 3% or 7%. Investors essentially take a leap of faith that annual inflation stays low enough over the 10-year period for the interim interests to compensate for the purchasing power loss, plus some changes. Most of us are perfectly comfortable assuming that inflation won’t be as high as 5% for 10 years. But are we fooling ourselves? I suggest using an inflation calculator to see for ourselves. Spoiler alert: Late 1960s through early 1980s can be an eye-opening period. How’d we feel if the next 10 years turn out to be something similar? Think about how you might feel when you safekeep your money in a so-called secure investment, give up higher returns available from risky investments, and then encounter an inflationary regime. Your minimum expectation was that your purchasing power would remain intact and perhaps improve a little by the time your bond matures. Instead, unforeseen inflation erodes your purchasing power and compromises the financial goal the fund was supposed to cover.  Your “safe” investment fails you completely. You realize that it wasn’t safe at all.  If unexpected inflation is so devastating, why are we so lax about it?  I can think of two reasons.  First, our minds haven’t adapted to the reality that, unlike to a “real” asset like a bag of rice or a gallon of gasoline, money in its current form is inherently self-eroding. It slowly loses its worth over time. A hundred dollars sitting around will still be a hundred dollars next year, but it won’t buy the same amount. We don’t intuitively perceive the continuous loss of purchasing power. Even when we do internalize it with some effort, we get used to the “pace” of the loss. In other words, we view inflation as steady and unexpected inflation as highly unlikely. Alas, all it takes is a single prolonged inflationary period to change that perception. By then, however, the damage to existing fixed income investments may already be done. Frankly, I’d be very wary of keeping my long-term “safe” money -- fund that I need to preserve beyond a three-year horizon - in any form that isn’t protected against unexpected inflation. For bond investments, the most meaningful option would be TIPS. Why? Because, in addition to being secured by the full faith and credit of the US Government just like any other Treasury securities, TIPS provides three important assurances upfront. First, it provides protection against unexpected inflation, which is a realized inflation that differs from what we expected when purchasing it. If the actual inflation averages 12% instead of the expected 2%, the principal is automatically adjusted to reflect the actual inflation. No guesswork or unexpected risk involved. Second, it provides a “real interest rate” upfront that tells us how much the purchasing power of the investment will increase over time, regardless of what the actual inflation turns out to be. Buying a 10-year TIPS with real 2% annual interest means the investment’s purchasing power will grow 2% per year over the holding period, before considering taxes and other factors. The third aspect is more nuanced. It involves the possibility of inflation being lower than expected, or even negative inflation (aka deflation). Let me elaborate. If a regular nominal 10-year Treasury Bond offers 5% annual yield and an equivalent TIPS offers a real annual interest rate of 2.75%, the market-implied inflation, the breakeven inflation rate, is roughly 2.25% (5% minus 2.75%). Actual inflation, of course, will be known only after 10 years when the bond matures. Suppose the actual inflation turns out to be only 1.25%. The nominal Bond investor would end up with more purchasing power than the TIPS investor because the TIPS principle would be adjusted by only the actual 1.25% inflation rate.  The primary objective of the TIPS investor would still have been met: preserving and improving purchasing power by about 2.75% annually. But there would be a “missed opportunity”. The nominal Treasury investor would end up with even greater purchasing power. Does it mean that a TIPS investor can face an unlimited opportunity cost if inflation turns out to be negative? What happens if the actual inflation is, hypothetically speaking, negative 5%, in a severely deflationary period? Does the TIPS investor get back proportionately reduced principal at maturity? Thanks to the third assurance of TIPS, the answer is NO.  TIPS guarantees that the principal returned at maturity will never fall below the original face value. During periods of deflation, the inflation-adjusted principal can fall below its face value and the interim interest payments will decline accordingly. But at maturity, the principal is floored at the original principal amount. Therefore, the breakeven inflation rate, the difference between the yield of a nominal Treasury bond and the real yield of an equivalent TIPS, represents the maximum annual yield advantage that the nominal bond can have over TIPS in an unexpectedly low inflation regime.  To summarize, a TIPS investor gets unlimited protection against unexpectedly high inflation, while accepting a limited opportunity cost should the actual inflation be low or even negative. The magnitude of that trade-off is reflected in the breakeven inflation rate at the time of the TIPS purchase.  An aside: given the destructive impact of deflation on economy and society, policy makers are generally more concerned about preventing prolonged deflation than about preventing modest inflation. Therefore, prolonged deflation is usually considered less likely. Still, we cannot ignore deflation risk altogether and should be prepared for the possibility that TIPS can underperform a nominal bond if inflation runs low.  Therefore, the decision to favor TIPS over an equivalent nominal Bond hinges in part on the current breakeven inflation rate. If it’s low enough, favoring TIPS can be an easy decision. Getting unlimited protection against unexpectedly high inflation is worth accepting the relatively small opportunity cost if inflation comes below the breakeven rate. There is, however, a cautionary note about buying TIPS bonds in the secondary market, especially older issues. Consider a 30-year TIPS bond issued 20 years ago and a 10-year TIPS issued within last 6 months. Both might appear to be valid choices if they mature within a few months of each other and offer similar yields. But beneath the surface, one may be more favorable than the other.  The older TIPS will likely have a much higher inflation-adjusted principal because it accumulated 20 years of inflation adjustments. But the protection against unexpected deflation applies only to the bond’s original face value, which is typically $1,000.  In a prolonged deflationary period, the older bond has much more room for its inflation-adjusted principal to decline before reaching the $1,000 floor. The newer issue, whose adjusted principal is much closer to the $1,000 face value, has less exposure to this risk. Therefore, all else being equal, I’d favor a TIPS with a low inflation-adjusted factor when buying in the secondary market. All things considered, my vote goes to TIPS for long-term “safe” investments, provided the break-even inflation is reasonably low. For secondary market purchases, however, a high inflation-adjustment factor would give me pause.   Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.
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Tax Complications – How SS Benefits interact with Other Income

Rick Connor  |  Aug 18, 2026

"Rick: Thank you for your community service with AARP Tax-Aide. I encourage other Humble Dollar readers to volunteer their time in whatever manner suits them."
- Hall Plante
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Federal debt

R Quinn  |  Aug 19, 2026

"As long as the people who run the show keep thinking the way to get out of debt is to cut income it is going to get exponentially worse."
- Kenn Garner
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The Intentional Spendthrift

Mark Crothers  |  Aug 21, 2026

"Mark - first of all, I've missed your posts. Glad you're still here. Second, my trip to Spain 3 years ago was an excellent introduction to the "house red" wine wherever I went. It was fabulous. I have no idea what it cost, but it was probably less than your brandy!"
- Jeff Bond
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Reaching Two-thirds of a Century!

Rick Connor  |  Sep 3, 2024

"Thanks Jack. He is now a very smart 13 year old."
- Rick Connor
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$40 Trillion of Debt

ArticleAdam M. Grossman  |  Aug 22, 2026

SOME MILESTONES are auspicious. Others are not. This week, the Treasury announced that the federal government’s debt had topped $40 trillion for the first time. Government debt is nothing new, but the problem is now of more concern, for two reasons. First, the scale has grown. An apples-to-apples way to look at the government’s debt load is to compare it to GDP—the economy’s total annual output. On this basis, outstanding debt now exceeds 100% of GDP, a level we haven’t seen since the period immediately after World War II. That brings us to the second concern: If the government isn’t able to balance its books while the economy is strong, as it is today, lawmakers will have less flexibility to act when the next recession occurs. For a brief period about five years ago, a theory known as modern monetary policy entered the conversation. The idea, popularized by a book titled The Deficit Myth, was that we shouldn’t be so concerned with deficits—that the U.S. government should be able to borrow more or less as much as it wants. What we’ve seen, though, is that eventually deficits do matter. In simple terms, the government now takes in about $6 trillion per year in revenue, but it's spending almost $8 trillion, resulting in deficits of roughly $2 trillion. And just like a consumer who's run up a big credit card bill, interest payments now consume an ever-larger portion of annual spending. In round numbers, the government this year will spend about one in every six tax dollars it collects on interest and will spend more on interest than on defense. Why have the numbers gotten so much worse? The first factor was Covid. The government had to take extraordinary measures to pull the economy out of recession. But while that spending was mostly justified, the problem is that Congress grew accustomed to larger budget shortfalls and has been unwilling to rein things back in. Congress, in fact, went in the opposite direction when it passed a set of tax cuts a few years back. Those cuts might not have been such a problem, except that one of the lasting effects of the pandemic was inflation. It hit a high near 10% in 2022, and while it’s come down from that peak, it's still higher than it was prior to 2020. What’s the connection between inflation and the deficit? It’s more indirect, but it may be the government's biggest problem at this point. The Federal Reserve's primary strategy in fighting inflation is to raise interest rates, and that's exactly what it did beginning in 2022. That helped with inflation but became a problem for the deficit because the government is such a large borrower, and higher interest rates translated to higher borrowing costs. Unfortunately, the issue has now started to compound on itself. Despite the Fed’s lowering rates, which it has done a handful of times over the past few years, market interest rates have remained stubbornly high, especially long-term rates. That’s because the government is being forced to pay more to borrow, just like any prospective borrower whose finances look shaky. This has become something of a chicken-or-the-egg problem. If rates were lower, the deficit might shrink considerably. But rates may not drop until investors see that lawmakers have gotten serious about the issue.  Why hasn’t Congress addressed the problem? In short, it’s because the two most obvious solutions—raising taxes or cutting spending—are the last thing any politician wants to do. Ironically, this may be the one area where both parties are fully aligned. Hopefully Washington begins to get serious about the problem. For better or worse, though, this is the situation we’re in. Against this backdrop, what steps might you consider for your portfolio? Because the deficit is so closely tied to interest rates, the first area I’d focus on would be your bond holdings. With long-term interest rates at multi-decade highs, there might appear to be an opportunity to profit from long-term bonds if rates were to drop. I would be cautious, though. Just this week, we’ve seen volatility in long-term rates, and things could easily go the other way. For that reason, I recommend a conservative posture toward bonds, with the majority in short-term holdings, only a small amount in intermediate-term and none at all in long-term bonds. To be sure, this might mean forgoing some profits if rates come down, but in my view, the bond side of a portfolio should be the part that helps investors sleep at night rather than another area to worry about. What other steps could you take? I’d give thought to your long-term tax exposure. It’s possible that politicians will eventually get serious and raise taxes, and if they do, you’d want to be in a position to manage your own tax bill. Fortunately, there is one clear route to inoculating part of your portfolio against tax increases, and that’s to look for ways to build up dollars in a Roth account: If you’re in your working years, you could contribute to a Roth IRA or a Roth 401(k). Your employer might even allow for so-called mega back-door Roth contributions. If you’re retired or happen to have a low-income year, consider a Roth conversion.  A final recommendation: If you have a net worth over $10 million or so, you might give thought to estate tax strategies. Today the federal estate tax applies only to individuals with more than $15 million in assets, but this threshold has been a political football and could easily end up much lower. As recently as 2008, it was at just $2 million. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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New in 2025 – Code Y on 1099-R box 7 for QCD’s

William Perry  |  Apr 26, 2025

"Here is a link to the 2026 draft 1099-R instructions dated Jun 17, 2026 wherein the IRS writes, on a preliminary basis, the following - ...unexpected issues occasionally arise, or legislation is passed—in this case, we will post a new draft of the form to alert users that changes were made to the previously posted draft... Code Y for box 7a on Form 1099-R. We added code “Y” to the list of codes for box 7a to identify a qualified charitable distribution (QCD). See Qualified charitable distributions (QCDs), later. For tax year 2026, the use of code Y to report a QCD is optional. If you are completing and filing a 2026 Form 1099-R, you may choose, but are not required, to enter code Y in box 7a. It is difficult to provide timely, clear and objective guidance when the agency who interprets the laws passed by congress and writes the detailed regulations have not finalized their rules for the tax year we are more than halfway through. My intent in this updated post was to encourage using a direct from IRA custodian to charity method for those who are making qualified distributions to avoid potential tax compliance headache for you and your tax preparer. I do not have any idea if your broker will choose to use code "Y" regardless of the method of how the QCD is distributed."
- William Perry
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TreasuryDirect changing login procedure to mandate ID.me later in 2026

William Perry  |  Aug 15, 2026

"I actually tried redeeming my U.S. EE Savings Bonds at several local banks two years ago. None of them will accept them anymore. They all referred me back to Treasury Direct as the only option. I still haven't completed that conversion process."
- Frank McIntire
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Manifesto

Aug 23, 2026

NO. 69: WE CAN’T control whether stocks rise or fall, but we can ensure we pocket whatever the market delivers—by diversifying broadly, holding down investment costs and minimizing taxes.

think

Aug 24, 2026

EASTERLIN PARADOX. Within a society, those with higher incomes tend to say they’re happier, observed economist Richard Easterlin in 1974—and yet, as the society’s income climbs over time, overall happiness doesn’t increase. For instance, the U.S. standard of living has more than doubled over the past four decades, but happiness hasn’t budged.

Truths

Aug 23, 2026

NO. 129: FOREIGN shares tend to rise and fall in sync with U.S. stocks, but that close correlation doesn’t mean you’ll get the same return. In many years, there’s a big performance difference between U.S. and foreign shares—and the gap is even larger in any given decade, with the two asset classes often taking turns posting strong results.

act

Aug 22, 2026

SHORTEN YOUR commute. Thinking of moving home or taking a new job? Research suggests that if you can keep your daily commute to under 20 minutes—and preferably walk to work—you will be happier. By contrast, a long commute, especially by car, is associated with greater unhappiness, worse physical health and a higher divorce rate.

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Manifesto

Aug 23, 2026

NO. 69: WE CAN’T control whether stocks rise or fall, but we can ensure we pocket whatever the market delivers—by diversifying broadly, holding down investment costs and minimizing taxes.

Spotlight: In Retirement

How Not To Invest

Adam M. Grossman   |  Oct 11, 2025

BARRY RITHOLTZ’S NEW BOOK, How Not to Invest, offers investors a cautionary tale—many of them, in fact.
Ritholtz has been in and around the investment industry for more than 30 years—as a trader, a journalist and, most recently, as cofounder of a wealth management firm. 
In short, he is no stranger to Wall Street. His conclusion? It can be a minefield.
Bad actors like Charles Ponzi and Bernie Madoff are well known.

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Widow Tax

John Urban   |  Jul 25, 2026

THE WIDOW TAX is sold to the wrong households. It gets pitched to affluent couples as the reason to convert to a Roth or buy life insurance. The pitch says that when one spouse dies, the survivor files single, lands in a higher bracket, and gets clobbered. I ran the numbers for three couples at three incomes, and at the comfortable end the widow tax often costs nothing, or even less than nothing.
The real cost lands lower down,

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Sector Fund by Stealth

Mark Crothers   |  Mar 7, 2026

I’VE RECENTLY MADE the most significant change to my own portfolio in thirty five years. For the first time I’ve moved away from pure market-cap investing, tilting meaningfully toward Europe and Southeast Asia and bringing my US technology concentration down to around fifteen percent.
I’m retired. I don’t need to chase the outperformance that concentration might deliver, and I don’t need the potential volatility that comes with it. This is a personal position rather than any kind of recommendation;

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Free Social Security Taxability Calculator

Rick Connor   |  Aug 14, 2025

While researching an article on the impact of the recent One Big Beautiful Bill Act (OBBBA) I stumbled upon a very useful, free Social Security Taxability calculator. The calculator is a downloadable Excel spreadsheet. I found it while viewing a YouTube video presented by The Retirement Nerds. The video did a nice job of explaining some of the provisions of the tax bill, especially the new $6,000 bonus senior deduction. The presenter used the calculator to demonstrate the interaction between income,

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Dealing with a reduction in Social Security benefits. Is there a backup plan?

R Quinn   |  Aug 26, 2025

A recent post on the Forum raised the issue of dealing with a cut in Social Security benefits – hopefully an unlikely or very temporary event. However, something still worth planning for. 
If the status of SS is not fixed, around 2033 benefits could be reduced by 23-24%. The Committee for a Responsible Federal Budget projects a 24% cut by late 2032 for retirees, equating to an $18,100 annual reduction for a typical dual-earning couple retiring in 2033.

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Not Qualified to Carry This Anymore

Dennis Friedman   |  Aug 13, 2025

I’m turning into my mother more and more every day. Back when I was taking care of her, she’d hand me her credit card whenever we went shopping. She’d say, “I’m not qualified to carry this anymore.” She was afraid she’d lose it.
Now I catch myself doing the same thing. When Rachel and I go out, I sometimes give her my wallet to toss in her purse. I’m scared I’ll lose it. Since I’ve retired,

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Spotlight: Lim

Keeping It Going

John Lim   |  Nov 27, 2021

AS 2022 APPROACHES, countless people will begin thinking about New Year’s resolutions—both financial and otherwise. There’s nothing quite like the start of a new year to inspire hope. Many of us will set big dreams and resolve to drop bad habits. According to Statista, just 9% of those who make New Year’s resolutions manage to keep them all. Meanwhile, by year-end, 28% haven’t kept any of their resolutions. What differentiates these two groups? Is it willpower or the lack thereof? Is it the audacity of the resolutions themselves? I don’t claim to know the answers to these questions. I do, however, know one thing. When it comes to keeping resolutions or forming new habits, there’s immense power in one phenomenon: keeping a streak going. Jerry Seinfeld discovered this truth decades ago. When asked for advice by a young comic, Seinfeld reportedly said, “The way to be a better comic is to create better jokes, and the way to create better jokes is to write every day.” He went on to describe his process. A large wall calendar hung in his room. Each day that he completed his task of writing jokes, he put a big red X over that day. Eventually, he would have a chain of Xs. His goal: Never break the chain. Two things about this strike me as salient. First, he focused on the process, not the final result. He didn’t resolve to become a great comic. He simply resolved to write every day. I imagine that some days were a struggle. But he put in the time all the same. He focused on writing jokes, one day at a time. In short, he was singularly focused on process. Second, the chain became a motivating force in and of itself. The longer the chain, the more motivated…
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Picking the Fruit

John Lim   |  Jul 24, 2021

LAST MONTH, the Federal Reserve released the results of its latest stress tests of major financial institutions. As an investor in Wells Fargo, I took special interest in the Fed’s findings. Why? If Wells Fargo passed the Fed’s stress test, it would be allowed to raise its dividend, which currently stands at a paltry 10 cents a share, amounting to a dividend yield of just 0.9%. I’m fully aware that my obsession with stock dividends is less than rational. For one thing, I don’t spend them. My dividends are automatically reinvested in additional Wells Fargo shares. Nor do the dividends necessarily increase the value of Wells Fargo stock. Every dollar in dividends paid out to shareholders lowers the price of a company’s stock by the same amount—at least in theory. That’s why a stock often falls in price on its ex-dividend date, which is the first day a stock trades without the benefit of its next dividend. And since I don’t actually spend my dividends, I really ought to prefer capital gains. After all, dividends are taxed the same year I receive them, but capital gains aren’t taxed until I sell the appreciated stock. In fact, the tax on capital gains may be avoided altogether by donating appreciated shares or bequeathing stock to your heirs, who inherit the stock with a step up in basis. Finally, I can always create “homemade dividends” by simply selling some shares as needed. When economists examine the irrational behavior of dividend lovers like me, they scratch their heads. In 1976, economist Fischer Black pondered the conundrum in a paper titled The Dividend Puzzle. In his words, “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together.” But guess what? I still love…
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Buffett Is Human, Too

John Lim   |  Feb 5, 2022

IMAGINE PUTTING your teenager behind a steering wheel to take a driving test without any prior preparation. The result is predictable—she would fail and you’d be lucky if she didn’t crash. Would you reprimand her for this result? Of course not. So why is it that so many of us are merciless—both to ourselves and even our loved ones—when it comes to our investing blunders? You know what I’m talking about: putting money into a meme stock that subsequently cratered; getting caught up in the dot-com bubble of 2000 just before it burst; putting our entire 401(k) into company stock only to lose both our job and nest egg when the company went belly up; or selling Amazon at $50 a share after getting back to even—a prime example of the disposition effect. How many of us have a degree in finance or the CFA—Chartered Financial Analyst—designation after our names? The reality: Most of us have never received any formal training in personal finance or investing. Not surprisingly, only a third of Americans can pass the most basic of financial literacy tests. What about the pros? Even the best of the best make mistakes—sometimes large ones. Legendary investor Warren Buffett recently sold his longtime stake in Wells Fargo, frustrated by the bank’s accounting scandal. He sold many shares at depressed prices during the COVID-19 recession. This turned out to be a costly error. It’s estimated that he missed out on some $10 billion in gains based on the stock’s recent rebound. Interestingly, Charlie Munger—Warren Buffett’s longtime business partner at Berkshire Hathaway—had a different view on Wells Fargo's stock. As the chairman of Daily Journal Corp., Munger manages its investment portfolio, which also owns Wells Fargo. Unlike Buffett, Munger held on. My point isn’t to pick on Warren Buffett, who is perhaps…
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Risk Returns

John Lim   |  Mar 4, 2020

WE HAVE MUCH TO learn about the coronavirus, but we already know a great deal about financial risk—and, indeed, recent weeks have offered a brutal refresher course. What insights can we draw from investors’ reaction to this awful epidemic? Here are eight timeless lessons: 1. The greatest risks are those we never see coming. Some risks are predictable, such as stock market volatility. Others are less probable but widely known, like the possibility of a recession. But the most dangerous risks are those that catch us totally off guard. This is what led to Harry Houdini’s demise. Reclining on a couch, he was unprepared for a sudden barrage of gut punches. It wasn’t just the punches that led to his burst appendix, but rather those blows coupled with the fact that he was blindsided. Similarly, the risks that have the greatest impact on financial markets are those no one expected, so we’re unprepared for them, both financially and psychologically. Think about Pearl Harbor, 9/11 and the current coronavirus epidemic. 2. Uncertainty amplifies risk. While everyone is now aware of the coronavirus, its impact—both on human lives and on the global economy—is still a huge question mark. When a risk is quantifiable, it can be properly discounted by markets. But what do we do when there’s so much uncertainty? A rational approach might be to assign probabilities to various outcomes, and then weigh the economic impact of each. Needless to say, this is an onerous task. Instead, the human brain defaults to what Nobel prize winner Daniel Kahneman calls “system 1” thinking. We make an instinctual judgment, which is usually satisfactory for simple problems, but which can lead us astray if the problem is more complex. In fact, faced with an uncertain but threatening situation, we often assume the worst. This approach…
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Why We Go Wrong

John Lim   |  Jan 16, 2021

I’VE LONG BEEN flummoxed by the difficulty people have managing money. It all seems so intuitive: Save, invest, repeat. Buy more when the market falls and a lot more when it crashes. Rebalance by adding more to losing asset classes—which today means buying value and international stocks. Now, don’t get me wrong: I’m no financial genius. I’ve made my share of blunders. But I also know that being a do-it-yourself investor has saved me boatloads of money. When I’ve encouraged colleagues to do the same—imploring them that “it’s really not that hard”—I’ve received only steely stares and blank looks. It’s slowly dawned on me that the financial demons people wrestle with are real and of Herculean proportions. Finance is a minefield that few navigate without getting maimed. It’s replete with mirages—what you see is often not what you get. Our instincts hurt us more often than they protect us. Actions that are sensible in every other realm of life lead us astray in finance. What follows is an exploration of eight key concepts that many—and perhaps most—investors struggle with. The biggest paradox of all: While managing money may appear simple, it’s anything but. 1. Compound interest is the key to wealth. We’re woefully ill-equipped to wrap our heads around the wonder that is compound interest. Warren Buffett described his eureka moment at age 10. “That’s where the money is,” he told himself, referring to the power of compound interest. The miracle of compound interest is a collision of two intangible concepts—exponential growth and a long time horizon. It’s well known that people struggle when making decisions that have consequences well into the future. Economists refer to such myopia as “present bias,” a universal human tendency to favor the present over the future. The abysmally low U.S. savings rate exemplifies this…
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Solomon on Money

John Lim   |  Jul 17, 2019

THE MOST WIDELY READ book of all time, the Bible, has a lot to say about money. According to biblical scholars, money and wealth are mentioned more than 2,000 times. Out of the roughly 40 parables Jesus told, nearly half speak of money. Why does the Bible make such a big deal about money? The answer belongs in a Sunday sermon, not here. Still, I believe there’s a great deal to be learned from what the Bible says about money. Below are eight verses, all written by King Solomon. Solomon was the wealthiest man of his time. But he was also renowned for his great wisdom. Although he lived almost 3,000 years ago, his insights on money and wealth remain relevant today. Here’s Solomon on money: 1. “A wise man thinks ahead; a fool doesn’t, and even brags about it!” (Proverbs 13:16) While this applies to life in general, it also has huge implications for our finances. Do you know what you would do if a severe recession knocked down the value of your stocks by 40%? If you lost your job, do you have a rainy-day fund to see you through the next six months? Have you thought about the retirement you want and when you want it? The notion of retirement didn’t even exist in Solomon’s time. Thinking ahead is even more important today—and, thanks to the magic of compound interest, planning early pays enormous dividends. 2. “Lazy hands make for poverty, but diligent hands bring wealth.” (Proverbs 10:4) This one isn’t rocket science, but sometimes we need to be reminded about the simple stuff. If you’re a student, are you applying yourself diligently? The greatest financial investment you can make while in school isn’t a Roth IRA, but your own education. If you’re in the workforce, are you…
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