Is Cash King During Inflation?

Cash is always tangible, reliable, and at hand. People take money at face value. It's no wonder we often prefer hard cash to "shady" bonds, stocks, and investments because we can use it under any circumstances. Does this theory apply to extreme economic situations? Will money deliver us the same value in a recession and inflation? Let's discover the bitter answer: "is cash really king during inflation?"

A short economic rundown of the past years

The world received an economic shock treatment in the first few years of the 2020s. We still feel the aftershock after the 2007-2009 housing crisis and economic recession. Then, the Covid-19 pandemic made our life miserable, resulting in some US regions’ spectacular downfall and a heavy blow to the job market. 

Surprisingly, the real estate market was revitalized as many Americans moved to places with more free space and fewer restrictions. Those betting on keeping their savings in real estate instead of money made a fortune.

The inflation rate mirrors the economy’s current stand.

Many attribute the present inflation to the pandemic's after-effects and the never-ending Ukrainina-Russian War. One thing is sure; the annual inflation rate climbed to a "whooping" seven percent in 2021 from 1.4 percent in 2020, reaching a 40-year high value. Slowly but surely, things normalized as 2022 saw a moderate fall to 6.5 percent. According to predictions, 2023 will experience further improvements inflation-wise. 

Why is keeping your savings in cash not a good idea during inflation?

Right off the bat, money is an asset that depreciates over time, especially during inflation. Compared to recession-proof investments, having cash around won't generate returns, losing its worth. Suppose you had $1,000 in cash before 2021. That year, inflation was at a seven percent rate. Then, the purchasing power of your $1,000 declined to $930. 

Inflation eats your life savings alive!

Secondly, inflation shrinks your savings. Suppose you have $25,000 worth of savings in your bank account. Let's do some math! Interest rates on your daily balance vary from state to state. Nevertheless, it pays about 0.25 percent for sums between $25,000 and $49,999. It means that you receive $62.5 interest. 

Your $25,000, due to a seven percent inflation rate, will be worth only $23,250! When you expect savings of $25,062.5 in your savings account, its purchasing power will be worth only $23,312.5. In other words, in inflation, your money kept in a bank account (or "under the mattress," for that matter) actually devalues. Interest rates on personal savings will never keep up with inflation rates.

Which are the main domains that inflation influences? 

The inflation rate depreciating money hits the hardest when we’re discussing people in retirement. They can’t afford the same standards of living as before the inflation. Look no further than medical costs growing faster than any other service.

The devaluation of money will affect mortgages, college funds, and down payments. Discovering that the purchasing power of your hard cash won't be as potent as you imagined might stagger you.

Use your money wisely to invest in your home!

Still, no one can really predict what the future brings. For this reason, we advise you to bypass the curse of inflation and start investing smartly! And keeping your assets in money is not a particularly good idea.

Preparations for inflation start at home by cutting futile expenses and implementing energy-saving solutions. In fact, spending (or investing) your money in cost-efficient smart gadgets while you upgrade your home will have nothing but advantages in the long run. For instance, you can sell your home at a higher price and save on monthly electricity bills. 

Conclusion

Unfortunately, a recession will affect everyone to some extent. We must handle our life savings reasonably. Keeping our assets in money is a bad idea because inflation will erode its purchasing power. However, channeling all our bank account savings and hard cash into, let’s say, real estate investments would be a mistake. In conclusion, cash is not king during inflation. Albeit, emergencies can happen when you need money instantaneously. Our final advice is to diversify your investment portfolio!