Because of rising costs and the loss of purchasing power in Mexico over the past year, most of us know someone looking to earn a bit more passive income to lessen the impact.
In 2023 Mexico’s inflation rate averaged 5.5%, falling slightly below this level in recent months. Besides peso-based inflation, gringo residents have also had to deal with a headwind in the form of a rapidly depreciating dollar.
Last year, the dollar lost about 14% against the peso, significantly eroding the purchasing power of anyone living in Mexico on dollar-based income. For a group often accused of driving up the cost of everything in Mexico, these “first-world problems” will likely elicit no sympathy. And that’s fine by me.
Fortunately, there are numerous ways for foreign residents (and Mexican citizens alike) to generate additional spending money with minimal fuss. As with my previous post on CETES, we’re looking at safe and low-risk investments that generate consistent cash for living expenses.
Today I’ll share three new ways to earn passive income using spare funds you have lying around, i.e. money you don’t need to cover daily living expenses. These methods are U.S. Treasuries, U.S. I-Bonds, and a fintech savings vehicle from Nubank.
Investing in U.S. Treasuries
For those who didn’t find CETES bonds appealing – or didn’t meet the qualifications – you’re in luck. U.S. Treasuries are an excellent alternative.
Notwithstanding the periodic political standoffs in Washington over the debt ceiling, U.S. Treasuries are still considered the gold standard of safe investments worldwide. They’re backed by the full faith and credit of the U.S. government (which has never defaulted on them).
Treasury bonds are sold in weekly auctions and available in a range of maturities (from one month to 20 years). They can be purchased commission-free from the government website treasurydirect.gov or via major brokerages.
From experience, I know that Fidelity and Charles Schwab do not charge their customers a commission when buying U.S. Treasuries on their websites. And because those platforms are much more user-friendly and flexible, I recommend them over treasurydirect.gov.
Confusingly, the investment horizon dictates what the Treasury bond is called. Short-term Treasuries (1-12 months) are known as “bills,” medium-term Treasuries (2-10 years) are referred to as “notes,” and long-term Treasuries (20 & 30 years) are called “bonds.”
On a practical level, all you need to buy U.S. Treasuries is a:
- U.S. checking or savings account
- U.S. Social Security number
- Valid U.S. mailing address
- email address
- and of course a good internet connection
For context, only recently have Treasuries re-emerged as a good source of passive income. The Fed’s extended policy of interest rate repression following the global financial crisis of 2008 meant that investors looking for decent, steady income had to look elsewhere (and take on a lot more risk).
Thankfully, that’s no longer the case.
Since the Fed began hiking interest rates in 2022, Treasuries have returned as an excellent, safe source of passive income.
Currently, the best yields come from the shortest duration. Three-month T-bills currently yield about 5.4%, while one-year notes are at 5% and 5-year bonds are at 4.1%, reflecting expectations of the Fed lowering rates later this year.
T-bills, or “zero coupon bonds” as they’re sometimes called, pay interest only at maturity. Treasuries with longer investment horizons pay interest to investors every six months.
My personal view is that the Fed won’t be lowering rates very fast due to inflation not being fully under control, so for the time being I favor 3-month T-bills, since their yields are higher.
Some disagree with my thesis, so each investor must decide for themselves what investment horizon is best for their portfolio.
Investing in I-Bonds
Another ultra-safe and steady investment for passive income is I-bonds (aka “Series I Savings Bonds”).
First introduced in 1998, I-bonds differ from Treasuries in that their yield is adjusted for inflation and changes only once every six months.
The basic idea with I-bonds is to buy them when their yield exceeds the inflation rate. (like right now) Otherwise, your money in I-bonds is losing value.
During the pandemic, I-bonds were a shockingly easy place to earn good returns with essentially zero risk. They offered a guaranteed 9.62% for six months in 2022, when U.S. inflation was also above 9%.
At the time, I-bond yields far exceeded treasuries and other fixed-term, low-risk investments like bank CDs. Now, their yields are pretty much in line with those other options.
I-bonds currently offer a decent 5.27% return, or 210 basis points ahead of the latest U.S. inflation reading of 3.2%.
Unlike Treasuries, I-bonds can only be purchased on TreasuryDirect.gov. It’s one of the few reasons to grit your teeth and learn how to use this wonky website.
There are a few restrictions and benefits to be aware of with I-bonds:
- An individual can invest up to $10,000 USD in I-bonds each calendar year (whereas investment in Treasuries is unlimited).
- Principal invested in I-bonds can be redeemed after one year, but any I-bond cashed in before the five-year mark forfeits its last three months of interest.
- Because I-bond purchases are tied to a social security number, children can own them too.
I-bonds pay interest every six months, with the payout added to your account on TreasuryDirect. For more info on I-bonds check out this page.
Online Savings with Nubank
The final opportunity I’ll share in this post is also the most lucrative. It’s available here in Mexico, but not in the U.S. or Canada.
Given the lack of secure, convenient, low-cost, and customer-friendly banks in the Mexican market (due to the super low bar set by traditional players) a new crop of fintech startups is beginning to make waves here.
The most successful of the “new kids” is Nubank, a Brazilian start-up launched in 2013 with a digital-only model. Serving 90 million customers in Brazil, Mexico, and Colombia, Nubank is now the largest fintech company in Latin America — and worldwide.
Nu’s emergence as an innovator in the stodgy banking sector has been helped along by savvy, deep-pocketed investors like Sequoia Capital and Warren Buffet.
Nu’s first retail product in Mexico was a credit card, launched during the pandemic. More recently they’ve gotten approval to operate as a bank and began offering online savings accounts in Mexico only last year.
Nubank’s Mexican subsidiary is regulated by the National Banking and Securities Commission and CONDUSEF, the main institutions that oversee Mexico’s financial sector.
Their website conveys an anti-establishment vibe that’s been well-received by jaded and cynical Mexican consumers (especially younger generations):
Ahorros y débito sin condiciones absurdas
(translation: “Savings and debit without absurd conditions”)
More than good vibes, Nu is attracting hordes of new customers with an offer of 15% interest on its savings accounts, where funds are not locked down or restricted.
That interest rate certainly caught my attention. But is your money safe with Nu?
The answer is yes, to a point. Deposits in Nu bank accounts are guaranteed by the savings protection fund, up to $193,000 pesos ($11,500 USD).
This is a MUCH lower coverage limit for deposit accounts than at traditional banks.
As those of you who read my series on Mexican banking know, IPAB insurance guarantees deposits in traditional banks up to $3.1 million pesos ($185,000 USD). IPAB does not cover fintech companies.
The disparity in coverage between fintech and traditional banks represents — unfortunately for Mexican consumers — a huge gift from the federal government to the largest banks operating in Mexico.
By providing significantly lower coverage limits to customers of fintech companies, they ensured that the old guard would retain the vast majority of its wealthy Mexican clients. This leaves fintech players like Nubank free to compete for younger customers and the under-banked population, which is still a huge market in Mexico.
The insurance disparity aside, as coverage for fintech deposits in Mexico is so new — and the sector so young — it will likely take a financial crisis to show how dependable this insurance actually is.
What You Need to Open an Online Savings Account at Nu
- A smartphone and the ability to use mobile apps
- Mexican mobile phone number
- CURP & RFC numbers
- Mexican residential address
Is Nubank a good place to invest your savings?
For expats looking for basic banking services in Mexico, I don’t see Nubank’s lower insurance coverage as a problem. There’s no good reason to keep more than $200,000 pesos in Mexican accounts anyway, as your money is more secure abroad.
Nu bank accounts are a viable option for managing your everyday living expenses. Specifically, Nu account-holders can:
- Make electronic transfers to/from your account 24/7 in the mobile app without fees.
- Use physical and virtual debit cards for purchases in-person or online.
- Withdraw cash from ATMs in the Mastercard network.
- Connect their account to Apple Pay or Google Wallet.
- Access 24/7 support via chat, app, and phone.
- Access their deposited funds 24/7.
- Earn a 15% return on their savings deposited in the “cajita” (little box), akin to a virtual piggy bank inside their account.
- With no monthly maintenance fees n
Having shopped three of the largest Mexican banks for a debit account earlier this year, I can say emphatically that Nu’s account features go way beyond what traditional Mexican banks provide their ordinary customers.
The savings yield is so lucrative right now, it had me wondering what they’re investing in to generate such returns.
The website only says that Nu invests in“government securities and in qualified financial institutions with a low probability of default, to try to obtain the highest profitability at the lowest risk.” No additional details are available.
While I have no direct experience banking at Nu, a Mexican friend (and Millennial) who banks there has reported a positive experience thus far. She did mention that their 15% interest rate offer is set to expire sometime in the next few months.
As with everything in Mexico, it pays to do your due diligence and always, always diversify your investment holdings.