Don't save (too much) money
Saving money is one of the things many people say to do, and it is actually good to save some money in a savings account in case of an emergency. The thing is, if you have lots of cash in a savings account just sitting there, earning interest, you're losing money. Let me explain why and the alternatives to a traditional savings account.
Inflation
Inflation is like a silent tax on your savings, where the central bank (like ECB) or an institution like the Federal Reserve prints more money quicker than the economy can grow, causing prices to rise as the value of your currency to drop over time. Generally, governments and central banks want to keep this at around 1% and 2% per year to stimulate the economy, incentivizing people to spend.
At the time of this post, the US Federal Reserve is having trouble managing inflation, with levels as high as 7% (according to CPI), and the European Central Bank is reporting levels of 5% inflation.
Savings rates are too low
We are at a point where interest rates on deposit-insured savings accounts are at a historic low, at 0.06% per year as the average in the United States, or even negative in the case of the ECB. Hell, even “high-yield” offers like checking accounts, certificates of deposit, money market funds return less than 2% per year. To really see how much of a slap in the face these current rates are, you can look at Bankrate's “best savings accounts”!
Taxes
And finally, taxes. When you earn interest, in the United States it is taxable income and the government takes a portion of it. I have nothing against taxes, I feel they're needed for a healthy society but this combination of factors on savings makes you go net negative.
So what do I do then?
There are many ways of safeguarding your money from inflation. I must admit I am biased against the current financial system, and so I will most likely favor decentralized systems over centralized banks and institutions. It really depends on your risk tolerance and I am in no way giving financial advice please don't sue me
DeFi lending platforms
And by DeFi, I mean decentralized finance, not just stashing your cash in Nexo or whatever and earning interest on it. Decentralized finance is a new sector of fintech, without human intervention needed.
DeFi lending platforms, even for stablecoins, generally have higher rates due to their efficiency and the free market nature of DeFi. Just stick with reputable, audited, battletested DeFi platforms like Aave, BankerJoe, Compound, Yearn, etc. and you'll generally be fine (Again, not financial advice! Don't sue me!)
However, DeFi comes with some risks. The biggest one is the fact that you solely are responsible for your money, and that can be a good and bad thing. There is no central authority to restore your money when you lose your seed phrase or get hacked, but there is also no central authority to stop you from doing things with your own money, and no central authority to abuse this power they have and take your money.
Another is smart contract risk, where your lending platform gets hacked or you get rug pulled (the developers take your money and run). This risk is very minimal with audited and battletested contracts.
The last major risk is that you have to trust the token you're lending. Generally, if you trust the dollar (too bad for euro gang, very little euro stables out there), you could choose a dollar-pegged stablecoin, whether it be Binance USD or USD Coin or even the shady Tether.
However, DeFi lending can give large rates compared to traditional finance, in the range of 5-30%. These rates do fluctuate time to time but are generally way higher than traditional institutions. Personally, I have a high risk tolerance but you might not. DYOR and NFA.
Treasury bonds
Treasury bonds are debt issued by the US Treasury and are effectively riskless ways of earning interest. They are only taxed on the federal level and pay semiannually. I don't know too much about these, just that the maturity of the bonds are really long, 20-30 years, but there are liquid secondary markets where you can trade them freely.
TIPS (Treasury Inflation-Protected Securities)
The value of the principal on these bonds adjusts with inflation (measured by CPI). The interest on these is low due to their ability to keep up with inflation. They can mature in either 5 years, 10 years or 30.
You can buy them from the TreasuryDirect website. or from your broker.
Investing
For new investors, it's generally recommended not to go chasing after the next moonshot and instead, just investing in an index fund. You can invest however you like, honestly. NFA.
I think you should buy either the DeFi Pulse Index or one of Cook Finance's indexes for exposure to crypto, or if you want to go the old-fashioned stock route, just get some SPY.
NFA, you may lose money. DYOR before investing.
tags are here as to not bother anyone: #defi #savings #taxes #lending #investing #tradfi #cefi #inflation