Where to put your cash in times of inflation and recession

Many people today are concerned about inflation and recession in the US. In this article we advise you on where to put your cash in these times of turbulence for the American economy.

Main topics:

• The Federal Reserve continues to raise interest rates, what options exist to place your cash and not lose so much due to inflation.
• How much money should you have in bank accounts in a scenario of high inflation and the risk of a recession?

Those of us who have experienced inflationary processes know that the main loser in these circumstances is the money you have in the bank or in your wallet. Inflation is exerting its corrosive effect on the cash you have in your bank account. Then, you will need more money every day to buy the same amount of products that you bought before.

The ideal would be to have a magic wand, and, just like how governments do, they can print more money for you and that’s it, right? Well no, this would simply make the problem worse.

Why is inflation created?

Inflation is created when money is printed that is not produced by people’s work; but when new banknotes are created and launched into the economy. That makes the price of money or in this case its value go down.

We could see it in a way as simple as the price of tomato. Example: if there are few tomatoes, the price will be high, but if there are many, people will pay little for them and they lose their value. The same goes for money.

Everything seems to indicate that this inflationary process is not going to be so temporary; since, inflation has a natural inertia that does not stop so quickly. So the big question that many are asking right now is:

What to do with the cash saved so that it does not continue to deteriorate so quickly?

The good news is that finally, after many years of almost zero interest rates; Finally, opportunities begin to resurface that until now were like an extinct animal, since we knew they existed; but, they were not present.

With the increase in interest rates, we are going to present you with several options where you could place your cash. Always remember to review these options with your trusted financial advisor or planner.

But before that, you should ask yourself the following question:

How much money are you going to need for the short term versus the money that is rather for the long term?

To answer this question, you can use the following general rules for your short-term money. And the differential or long-term money, of course, should be invested.

First fundamental question: How much cash should I have in my bank accounts?

We already know that you should not have a lot of money in the bank because inflation is eating it up; but, we see that not even economists can agree and say whether we are truly in a recession or not yet. That is why having very little liquid money can also be a risk; since, we do not know the setbacks that a recession could bring to your cash flow.

Many of my financial advisor colleagues; point out that a good rule of thumb is to take the amount of your monthly expense and multiply it by 3 or 6 months. That should be the amount you would have to have and the spread to invest it.

But like everything there are many factors that can influence this rule, such as what stage of your life you are in:

• If you are young and have a stable job, this rule could be ideal; Since, if you were to lose your job, you could surely get a new one relatively quickly and while you don’t get it, use your liquid savings.
• If you are about to retire or if you are already retired; in this case you can combine two strategies. Have a fund of about 6 to 12 months for your spending, along with an investment portfolio; where together with your financial planner they have stipulated the annual or semi-annual amount that you should withdraw from your investments.

Factors to take into account about your cash

Other factors to take into account, which can cause the amount of money you have in the banks to be greater would be:

• If your family depends entirely on your income and your partner does not earn enough to support them all. In the event that you lose your job, the impact on your savings would be significant.
• If you work in something very specialized and you know that getting a job is not going to be easy for you; therefore, you can spend more time using your savings before getting another job.

At the end of this first exercise you will know the amount of money you can place in the short term; Therefore, we can move on to the next stage, which consists of always reviewing these three factors:

1. In what time will I need to use this money, in order to determine what would be short term for you.
2. What type of guarantee should this money have so that it is as safe as possible.
3. What are the different rates of return to see which option suits you best.

Remembering that;

a.-) The longer you leave your money immobilized, the normal thing is to receive a higher rate.

b.-) Do not put the money you need for day to day in instruments where you cannot mobilize it.

Options to put your money

So let’s see what are the different options to place your cash at a time when we are experiencing these high levels of inflation:

• High Yield Online Savings Accounts: as the name implies, they are bank accounts, where you must always validate that they have the protection of the FDIC – Federal Deposit Insurance Corporation, which covers up to $250,000 in the event that something bad happens with the bank where you placed your money. In this type of accounts, as you can see, as indicated by BankRate, rates are being achieved that as of November 2022 exceed 3% per year. Online banks have the advantages that: their account opening processes are very simple and many of them do not ask you to deposit a large amount, as well as provide you with great liquidity when you need to withdraw your money, being equal to a simple account bank but with better interest.
• Certificates of deposit or CDs, if you know that you are not going to need part of those funds for a while, you could seek to open one of these instruments, which have the guarantee of the FDIC and offer you a better rate than according to BankRate CDs that may be in the order of 4% depending on the term. Knowing that if you need your money before the deadline, they will usually apply a penalty.
• Money Market Mutual Funds, are mutual funds that invest in very short-term bonds and although they do not have the backing of the FDIC, they have historically managed to maintain their value and are considered very safe. Their rates are very attractive but there is a wide variety and it is good to consult with your trusted Financial Advisor or Planner.
• Bonds issued by the United States government, through the Treasury Direct web portal, you will be able to acquire online some bonds called I Bond, which have as fundamental characteristics that they adjust their interest rates according to inflation, for example for November 2022 they were yielding 6.89% per year. If they have a series of limitations such as you can invest up to $10,000 for each Social Security number, but you can acquire them from $25 and up. You must take into account that: You cannot sell them before the first year in case you need your money before and in case you sell them before 5 years they will impose a penalty, which consists of subtracting the last 3 months from your performance. As a fundamental advantage, they have the support of the American government and, furthermore, state or local taxes are not applied to them, but the federal one is. A widely used strategy is that families maximize the amount to invest using the purchases for each member of the household.

In the variety is the spice

As they say over there in the variety is the taste. One of the most interesting ways is if your savings allow it; make a combination of the different options in order to increase your overall rates of return.

You must remember that these options can be temporary; since, at some point, these interest increases will achieve their goal of lowering inflation. You should always know that the capital market has historically proven; be one of the few investments that manage to beat inflation over time. Long-term money must be invested in its corresponding term, always according to your risk profile as an investor.

Note: Historical returns are not a guarantee of future results. Information for educational purposes only.

Alonso Rodríguez Segarra

Founder & CEO Advise Financial

advise-financial.com

Alonso is a “CERTIFIED FINANCIAL PLANNER™” who is dedicated to increasing the Financial Well-being of nurses, physicians and successful immigrants in Florida and Texas. With more than 20 years of experience in the world of finance, always working for the best interest of his clients, under fiduciary criteria.