Inflation may be your cash’s greatest enemy.
As inflation hits a 40-year high, you may be asking yourself if you actually have too much money in your traditional savings account. The answer: Maybe. Most people should set aside enough cash to cover about six months of living expenses, says Matthew Jenkins, certified financial planner at Noble Hill Planning. But you probably don’t want to sock away a ton more in cash: “At the current level of inflation, the cash in your bank account will lose half of its purchasing power in about 9 years, so having a plan to protect any excess cash is vital,” says Jenkins.
With that in mind, it may seem counterintuitive to keep an emergency stash of liquid cash within arm’s reach, but Lauren Anastasio, director of financial advice at Stash, the online financial platform, says inflation is your cash’s greatest enemy — but cash is still king in the short-term. “Maintaining a cash cushion for emergencies is always encouraged, and you should also have any large upcoming expenses accounted for in cash,” says Anastasio. If you’re planning a down payment on a home or taking a vacation in the next 12-18 months, that’s money you’d want to keep in cash, despite inflation, avoiding risk in the market. “Any money you have above and beyond your emergency fund or earmarked for upcoming expenses can be invested,” says Anastasio.
At the end of the day, Bobbi Rebell, author of Launching Financial Grownups and personal finance expert at Tally, says you should have an amount of savings that makes you comfortable. “Inflation is a factor in that by putting money in a presumably low interest savings account, you’re almost guaranteed to lose money over time because inflation will outpace your return, thus locking in a loss. But you can’t let that keep you from having liquid assets available for when you need it,” says Rebell.
What’s more, rather than thinking of your savings from the perspective of interest earnings trailing inflation, Greg McBride, chief financial analyst at Bankrate, recommends thinking of it as a buffer between you and the high-interest credit card debt when unplanned expenses arise.
And though inflation is high, keep in mind that many asset prices are too. “There are worse things than sitting on a pile of cash waiting for a market downturn or attractive opportunity to pop up. Many wealthy people are happy to sit on cash right now and surrender 8% to inflation so they have the ability to scoop up assets at a 25% or 30% discount when they see it,” says McBride.
The best way to protect against inflation is to employ a diversified approach. Make sure you have an emergency fund of six or so months of expenses in something like a high-interest savings account, and then ensure your investments are diversified. “Consider investing in a wide range of assets including I-Bonds, TIPS, stocks, real estate and commodities,” says Jenkins. Here’s how pros told us they’re investing in these times of high inflation.