With the prospect of a recession looming many of us look to figure out where our money is and where it should be.
Personally, I think cash is one of the best assets in recession due to its security compared to the likes of stocks, shares, bonds, property, and precious metals.
But what does a cash asset really look like? Should you diversify your cash portfolio and how do you do that? and what ROI can you achieve from cash during a recession as a result?
These are some of the many questions I’m looking to explore in this article.
I am not a financial advisor. All investments should be discussed with a financial advisor prior to making any decisions. I can not be responsible for any decisions made as a result of this article. This is purely an opinion piece.
What Is A Recession?
An economic recession refers to a period in time where there is a decrease in the economy or negative economic growth.
Another way of describing a recession is the decrease in the gross domestic product (GDP) for either two or more quarters consecutively.
There are a couple of factors that often lead to a recession;
High-interest rates generally limit the amount of money that can be availed for purposes of investment.
A decrease in the confidence of consumers on the economy which translates to a low likelihood and willingness of consumers to spend money. This, in turn, causes production to slow down due to a significant decrease in the demand for products.
A steady rise in the prices of goods as well as services (inflation). This affects the purchasing power of an individual consequently resulting in a decline in the demand for goods hence a reduction in the manufacture or production of these goods and services.
A decrease in real wages which also means there is a reduction of an individual’s purchasing power.
If one’s salary cannot be at per with the prices of goods and services then one lacks the ability to purchase the said goods as well as services and this is what a reduction in purchasing power means.
Is Cash Good In A Recession?
The safest place for your money is in the bank. While a savings account in a recession may only yield 1% interest. Lower interest is, in my opinion, better than the possibility of huge long-term losses with investments in the stock market or in a property for example.
Thanks to compounding, even a small interest rate such as 1% can mount up over time.
In this article, I found that based on the average interest rates £100,000 compounded into £184,309 over the course of 20 years.
While this didn’t outperform other investment methods I covered, it was the only one where the money was guaranteed to remain safe (provided it’s with an authorized and regulated bank with government protection)
This sentiment is only more true during a time of economic downturn where businesses can easily go bankrupt and people (perhaps those who rent a property which you’ve used as an investment) can easily lose their job.
There is the argument that a recession is a perfect time to buy stocks, bonds, and index funds as they are essentially ‘on sale’. However, this should only be considered by those with a large number of cash assets who are in a position to be exposed to a high level of risk.
This should be carefully considered and discussed with your financial advisor.
Having cash in the time of a recession is a great source of liquidity when / if it is required.
My cash assets include;
- An emergency fund fitting mine and my wife’s current needs.
- Fully funded expenses for three months in YNAB.
- A short term savings account (we use this to save for holidays and interim large purchases)
- A long term savings account (which we can access with no fees)
These assets are continuously spread in this manner regardless of whether we are in a recession or not.
The only thing a recession changes for me personally is the amount of money I put into each of the cash assets to ensure that we are able to meet our financial obligations.
If you are able to comfortably meet your financial obligations for the foreseeable future (whether you lose your job as a result of the recession or not) then you have a stable number of cash assets.
This should include not accessing any long-term savings accounts with penalties or removing from your pension which will have tax implications and a major impact on your long term wealth.
Ensuring this remains the case (even if you lose your job or get sick) is the best way to safeguard yourself and your family from hardship during a recession and should allow you to exit the recession in a stronger position than you were when the recession began.