We’ve gotten a TON of questions recently from readers trying to protect cash savings during periods of high inflation.
Usually, having mad cash and not being sure how to spend it is a fun problem to solve. (Index funds + a nice seafood dinner at a non-chain restaurant is our default answer.) But right now, high inflation is sucking the pleasure out of Scrooge McDucking on a big pile of cash.
Now is a terrible time to be holding onto cash. Cash savings during times of high inflation are guaranteed to lose value. For example: if you had $1,000 saved a year ago, our 8.5% inflation rate means that money can only buy $915 worth of goods today. It sucks for everyone, but especially so for people who’ve been saving up for a long time to hit a life milestone.
We know how hard our readers work and sacrifice to put money away. And it’s so painful to watch it lose its value because of reasons outside your control. So if you’ve got money sitting idle in your checking account, listen up! We’ll do our best to help you take the sting out of shrinking cash savings during high inflation.
Start by evaluating your risk tolerance
People stockpile cash for wildly different reasons. Beware advice that doesn’t consider the context. One-size-fits-all is for accent scarves and Snuggies, not financial advice!
To protect cash savings during high inflation, the most important step is determining your risk tolerance. You need to understand why you’re saving, and the consequences of potential loss.
Let’s talk examples.
If you’re saving cash to get away from an abusive partner, you have low risk tolerance. If you lost it or couldn’t access it when you needed it, your life would be in literal danger. Someone with low risk tolerance wants to maximize safety and accessibility. They don’t care much about costs or returns.
Now, let’s say you’re a recent grad living with your parents. You’re all totally happy with that arrangement—but you have long-term plans to eventually buy your own place. A person like this has high risk tolerance. Safety is much less important because their situation is a lot more flexible. Growth is their #1 priority.
A lot of cash savers will fall somewhere in the middle. The most helpful question I ask myself to determine risk is “what would happen if I lost this money today?” If the answer is something dire like homelessness or bankruptcy, don’t fuck around. Otherwise, I’d strongly consider taking the risk of investing that money.
Plan A: Eliminate your need for large cash savings during high inflation by spending it
The best way to protect cash savings during high inflation?
Oui, I’m being serious.
When inflation is higher than normal, it’s ideal to invest money rather than save it. Modest inflation is a feature of our economy, not a bug. It shoos the dragons off their hoards and encourages them to put their wealth back out into the economy. For a deep dive into that topic, see this article written by a singularly brilliant person I like to call “myself!”
It’s been fun being your feminist socialist personal finance ICONS, but we were bitten by a radioactive neoliberal, and must transform into Rich Uncle Pennybags But Girls now. The solution to all the economy’s problems is to buy more things. Byeeeeeee~!
Convert your cash into goods
A lot of our readers have told us they’re saving cash for a major purchase and/or life milestone. New (used) cars, first apartments and houses, weddings, home projects, itty bitty babies… all fantastic things to save for!
But inflation drives the cost of everything up. Tangible assets like vehicles and real estate maintain value better than cash savings during high inflation. So if you’re saving cash for a purchase, pull the trigger on it as soon as you can.
This may mean compromising on your original goal. If you can’t afford the 2021 used car you wanted, could you swing the 2019? If you’re dreaming of a single family house but prices are too hot, could you settle for a modest condo as a stepping stone?
It could also mean getting creative. Let’s say you’ve got $2K saved toward a $20K goal of redoing your extremely 1950s kitchen. (Why would you, tho?) It may be better to convert that $2K into a new refrigerator now. The alternative is letting that money sit idly in the bank, awaiting a bleak future where fridges cost a couple hundred bucks more.
Many longer-term goals can be broken into smaller parts. Saving for a child? Buy some nursery furniture now! Planning a wedding? Book your vendors in advance! More advice on saving for goals like these…
- What Does Your Dream Cost?
- Businesses Will Happily Give You HUGE Discounts if You Ask This Magic Question
- Almost Everything Can Be Purchased Secondhand
- I Am a Craigslist Samurai and so Can You: How to Sell Used Stuff Online
Pay off debt
Inflation doesn’t have many pros, but it does make it theoretically easier to pay off debts. Wages theoretically rise to compensate. The amount you owe should be theoretically relatively less painful as time goes on.
… Was that enough “theoreticalies?” Obviously, there’s a lot of pain as wage gains tend to lag behind price gains.
There are two potential strategies to manage debt wisely during high inflation. Some would say it’s best to keep your debts, paying back only the minimums, relying on inflation to eventually make their sting less painful. And that might be a good tactic for some people and some situations.
But you know what benefits everyone in all situations? Having no monthly debt repayment bills a’tall! Using excess cash to pay off debts may not be the most (robot voice) mAtheMaTicaLLy oPtiMaL choice in the short-term. But being debt-free is an amazing long-term investment for your peace of mind and quality of life.
Piggy and I are millennials. Financial instability has stunted our generation, and that’s shaped our view of debt. We’re super, duper debt-averse. Debtphobic, even. There are many investments and purchases I wish I could change or take back—but I’ve never regretted paying off a debt.
Important side note: If any of your debts have a variable interest rate, BANISH THEM TO THE SHADOW REALM. They will keep up with inflation, and vampirically suck away at your budget until killed.
Reevaluate your emergency fund
Another common concern among readers is what to do with emergency funds.
Emergency funds are a crucial buffer against the instabilities of our unjust world. I cannot overstate their importance. No matter how wealthy and stable I become, I will always have a plan for how to address unexpected expenses. Cash is a piece of that plan, even during times of high inflation.
That said, more isn’t always better when it comes to cash emergency funds.
Lots of people—especially Millennials, Gen Z, queer people, and women— have a tendency to over-save as a way to cope with financial anxiety. That’s understandable as fuck, and a somewhat benign problem in normal times. But it is holding those groups back. And it’s especially harmful in the long term to keep unnecessarily large cash savings during high inflation.
Now is a great time to think critically about the size of your emergency fund. Given that unemployment is low, and jobs are pretty easy to come by, could you scale back from having six month’s savings to three months? Could you do what we suggest in this article, and reserve credit cards for true emergencies?
Ladies! Queers! Children! I love you so much. Please stop hoarding cash, you precious chucklefucks. You’re losing money doing it. There are better ways to make yourself safe. I need you financially stable and politically powerful, m’kay?
Plan B: If you MUST keep cash, optimize where you put it
Sometimes, there’s no avoiding having a large stash of cash.
If you’re actively shopping for a house, for example, your home down payment needs to stay—pun intended—as safe as houses. After all the hard work of home shopping in a dystopianly competitive market, the last thing you want is to miss out because your money is tangled up elsewhere.
Here are some of the most common, convenient places to put cash savings during high inflation. Keep in mind that these are my candid opinions. And I am an uncredentialed, recently jobless dumbfuck.
If you need it NOW, consider a high-yield savings account
High-yield savings accounts (sometimes called a HYSA or “hissah,” which I don’t like because it sounds like someone hissing at me and I’m very sensitive) are still superior to traditional savings or checking accounts.
But it’s not by much.
At time of writing, even the best high yield savings accounts are only offering about 0.6% interest rate. When you’re losing 8.5% to inflation, that’s a fucking joke.
You will lose money keeping cash in a high-yield savings account. But that’s a cost you’ll have to eat if you want your cash to be liquid and immediately accessible. And if any of those terms are unfamiliar, we gotchu:
- From HYSAs to CDs, Here’s How to Level Up Your Financial Savings
- What’s the Difference Between Savings and Checking Accounts, and How Should I Be Using Them?
- Not Every Savings Account Is Created Equal
If you need it in 1-2 years, consider bonds
Thank the fucking stars I don’t have to explain what bonds are, because Piggy already did so. Do you have any idea how many spoons it takes to make bonds pithy and exciting? Several more than I have!
But the tl;dr is that both corporate or government bonds are reliable and accessible, offering between a 2-3% interest rate. You’re still losing money, but less of it.
Although we’ve recommended CDs in the past, they aren’t wise right now. Your money will be locked in a low-return CD for the next two years. So if inflation does start to cool and rates rise, you can’t access your cash, and you’re missing out on better opportunities.
Ya hear me? No CDs until further notice!
If you need it in 2+ years, consider investing it
In the last year, inflation was over 8%. And savvy readers will note I haven’t suggested a single option that comes close to wiping that loss clean.
Which is why I’ll remind you that the rate of return on the S&P 500 last year was over 26%. And home prices weren’t far behind at 19%.
To put that into greater context, let’s say Piggy and I both had $1,000 to spend at the beginning of last year. She put hers in a high-yield savings account, and I put mine into index funds on the stock market.
Twelve months later, she would be able to buy $920 worth of goods. But I could buy $1,268.
This is why inflation fucks over timid investors and cash-hoarders.
Obviously, rates of return are never guaranteed. The market’s seen wild fluctuations during the pandemic. You will lose money temporarily, and you may even lose some of it permanently.
I know this from personal experience. When I had $50,000 saved toward a home downpayment, I wasn’t in a hurry to shop. So I invested the downpayment in the market. Unexpectedly, I found the perfect home much sooner than expected. When I went to take my money back out, I’d lost $3,000 of it due to some kind of flimflammery in the Chinese markets. I had to sheepishly ask my incredibly kind in-laws for a short-term loan to get us from closing to our next paychecks.
But it’s a choice I’m still glad I made. I knew my situation; I knew I had several layers of safety nets. And I was just as likely to have made $3K as lost it. So even thought it burned me once, Present Me would make the same choice as Past Me. And it’s a choice I strongly encourage you to consider, if you don’t need that money right away and have time to recoup.
Inflation is ALWAYS working against us
We’re alive in truly
sadistic chaotic Ragnaröky extraordinary times. So much about the future is unknown.
But if one thing is clear, it’s that inflation is higher than usual, and that’ll take months or years to change. Until it does, you need to have a really valid, strategic reason for keeping large amounts of cash on-hand. High inflation does quite enough damage on its own. Keeping cash savings during high inflation only multiplies the damage.
If pushed to be optimistic, I’d say I see this moment will compel many more people into investing. Unfortunately, I’m not the only person who sees that opportunity. Fly-by-night cryptocurrencies and NFTs are out there snatching up huge sums, mostly from young people and people of color who are rightly disillusioned by traditional investing. Our feelings about that are well-documented. (In summary: 😢)
We do think traditional investing has much better potential to generate wealth and stability for people who need it, while redistributing power away from those who have too much. Especially if used in conduction with
guillotines ethical investing strategies.
If you have friends who don’t know how to do this stuff, please don’t leave them in the cold darkness to be eaten by wild dogecoins! Browse the articles on our recent investing for beginners masterpost and share them with someone who needs them. And please consider supporting our work on Patreon! Being your guides is a task we love, and take very seriously, except when we don’t because we have to tell jokes to keep you awake.
People stockpile cash for wildly different reasons. So what’s yours? Why do you have cash right now? Are you saving up for something big? Have you found a better inflation-proof strategy for storing short-term cash? Please share in the comments below!