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.
Cash gives you a lot of options. You can spend it if you need to, for example, if you lose your job during a recession, and it allows you to make an opportunistic investment if the stock market suddenly sells off or you find the perfect house later on. But there is a downside to holding too much cash.
Efficient business cash flow management is always important, but in times of recession, it's essential. Economic slowdowns make it harder to chase invoices, pay your suppliers, or get a bank loan.
During periods of inflation, the adage “cash is king” takes on new significance. Cash offers the flexibility and freedom to respond to changing market conditions. While inflation erodes the real value of cash over time, holding cash can provide the liquidity needed to seize investment opportunities quickly.
Money markets are capturing a record inflow of $1.4T in 2023, according to BofA Research.
What Is Cash Is King? "Cash is king" is a slang term reflecting the belief that money (cash) is more valuable than any other form of investment tools, such as stocks or bonds.
Investors typically flock to fixed-income investments (such as bonds) or dividend-yielding investments (such as dividend stocks) during recessions because they offer routine cash payments.
So, the first thing you should do to make your portfolio more recession-resistant is shore up your cash reserves. Otherwise, you may be forced to sell stocks during a market decline, thereby locking in losses and undercutting your portfolio's capacity to recover.
Recessions typically go hand in hand with higher unemployment, and finding a new job may not happen quickly. Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts, suggests keeping 12 to 24 months of expenses in cash.
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.
Can you lose money in a savings account during a recession?
Although the government has stepped in to contain the damage caused by the bank failures and ensure account holders can access their funds, inflation and interest rates remain high, so the threat of a recession persists. Generally, money kept in a bank account is safe—even during a recession.
GOBankingRates consulted quite a few finance experts and asked them this question and they all said basically the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
The concept of "cash is king" describes the importance of sufficient cash as an asset in the business for short term operations, purchases and acquisitions.
- Check your interest rates. ...
- Consider opening a high yield savings account. ...
- Consider a money market account. ...
- Keep investing your long-term savings. ...
- Explore the bond market. ...
- Consider sticking short-term savings into a CD.
High net worth individuals — defined by Capgemini as those with $1 million or more in investable assets — held over 34% of their portfolios in cash as of January 2023. That's the highest level since at least 2002. It's also significantly higher than the 24% cash exposure these investors had last year.
Cash might not be king anymore, but it still has a place in millions of Americans' wallets. Some lawmakers want to keep it that way.
As people move toward more electronic or digital forms of payment, it might seem like paper money is on its way toward obsolescence. But experts say that cash will always be around.
The Great Depression lasted from 1929 until about 1939, leading to massive unemployment and bank closures worldwide. Was cash king during the great depression? Yes, it was. Those who had access to cash were able to benefit from the plummeting asset prices around the world.
Higher interest rates are primarily responsible for the current love affair with cash. With the base rate settled for the time being at 5.25% – compared to 0.1% in early December 2021 – cash is sexy again. A clutch of deposit takers are paying savers more than 5%.
Companies are more likely to fail due to not having enough cash on hand versus not making enough profit. Having a large amount of cash on hand can provide a protective buffer against financial losses and allow for the opportunity to purchase discounted assets during a market downturn.
Is it good to have cash now?
As for your long-term money, you're likely better off in assets, such as stocks, that fluctuate more than cash, but that tend to deliver higher returns over time. That's because even though cash looks attractive now, it's historically done a lousy job keeping up with inflation.
During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.
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.
Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.
That should include a little cash stashed in the house, enough to cover the monthly bills in a checking account, and enough to cover an emergency in a savings account. For the emergency stash, most financial experts set an ambitious goal at the equivalent of six months of income.
