Why is cash king during a recession?
The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis. While cash investments -- such as a money market fund, savings account, or bank CD -- don't often yield much, having cash on hand can be invaluable in times of financial uncertainty.
During a recession, nothing is more valuable than cash that's readily available. I recommend saving for predictable expenses like car repairs or medical expenses. You'll also want to pay off and consolidate debt to bring your payments down.
The simple answer is that during recessions people tend to lose their jobs, and when you don't have cash coming in for a while it's very important to have savings available to spend. That buffer could save you from losing your home or worse.
Ultimately, cash was king during the Great Depression. Investors who held on to their money instead of putting it in risky stocks or bonds had the best chance of coming ahead.
Cash means liquidity
During uncertain times, holding cash provides liquidity. You'll be more confident navigating through inflation knowing you have funds to meet short-term financial obligations like paying bills, salaries, and other expenses.
To help prepare for a recession, job loss or other financial hurdle, aim to build an emergency fund that covers three to six months of living expenses.
Taking on new debt in a recession is risky and should be approached with caution. Pay cash if you can, or wait on big new purchases.
Treasury Bonds
Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments. That's because they are backed by the U.S. government, which is deemed able to ensure that the principal and interest are repaid.
Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Is cash King in 2024?
Cash is seen as the most attractive asset class moving into 2024, according to a new survey. But with interest rates forecast to drop, investors are likely to start reinvesting in risk assets soon.
“Cash is not king for medium- or long-term investors,” says Adam Hetts, global head of multi-asset at Janus Henderson. “Cash is always a necessary evil for very short-term needs. But for longer term needs, longer than 1-2 years out, that's where you can use longer duration fixed income.”
Hoarding cash means missing out on considerable opportunities. Two of these include potential returns and compounding interest. “When you hoard cash, you miss out on the potential returns you could have made from investing that money,” Hathai said.
When the prices for goods and services are rapidly rising, holding cash in your portfolio becomes less attractive. The prospect of prolonged inflation “argues against having too much in cash,” Christine Benz, director of personal finance and retirement planning at Morningstar, recently told The New York Times.
- Equities. Equities generally offer a reliable haven during inflationary times. ...
- Real Estate. Real estate is another tried-and-true inflationary hedge. ...
- Commodities (Non-Gold) ...
- Treasury Inflation-Protected Securities (TIPS) ...
- Savings Bonds. ...
- Gold.
Cashing in: One item Americans can't leave home without? Cold hard cash. Americans are more likely to carry physical cash (69%) than Chapstick (31%), mints (20%) and a checkbook (17%). The two biggest reasons people keep money on hand include emergencies (55%) and tipping (26%).
While it is legal to keep as much as money as you want at home, the standard limit for cash that is covered under a standard home insurance policy is $200, according to the American Property Casualty Insurance Association.
“More than two months' worth of living expenses in a savings account is too much given the ability to earn around 5% from easily accessible money market accounts that should not fluctuate in price.”
“As a general rule of thumb, having access to $1,000 in cash at home would ensure you can at least pay for immediate expenses in the case of a national emergency,” she said.
Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.
Should I pay off credit cards in a recession?
To help shield your finances from the impact of a recession, it's best to pay down as much of your credit card debt as you can, beginning now. If you aren't sure how to get started, our credit card payoff calculator can help you come up with a plan.
Money saved in a qualified retirement account, such as a 401(k) plan, is typically protected from private creditors as long as the money remains within the account. The IRS, however, may come after retirement funds to pay back taxes or other federal obligations.
Because of their higher level of sensitivity to interest rates, long-term bonds have historically fared best during recessions, although intermediate-term bonds and cash have also been pretty resilient.
- Cut living expenses. ...
- Build an emergency fund. ...
- Develop new skills. ...
- Speak with a financial adviser. ...
- Create passive income sources. ...
- Start a business. ...
- Consumer staples. ...
- Bonds.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
