The Power of Cash: Why Cash Is King During a Recession
Today’s economy is facing many challenges. On a global scale, we’re still reeling from the effects of the financial crisis. In the United States, we’re not currently in a recession.
According to business news and economic data, such as the gross domestic product (GDP), industrial production, the stock market, and the job market, the economy hasn’t yet spiraled into a recessionary state.
However, occurrences, such as ongoing supply chain issues and an inverted yield curve, point to us possibly heading into a recession. In this time of financial uncertainty, it is crucial to protect ourselves financially. One of the best ways to do this is to have liquid assets, such as cash, on hand.
What Will I Learn?
- What Is a Recession?
- What Does "Cash Is King" Mean?
- The Benefits of Having Cash on Hand
- The Disadvantages of Having Cash on Hand
- The Health of the Stock Market
- Is it Better to Invest in Stocks or Have a Cash Flow?
- Is Having Too Much Cash Possible?
- The Takeaway
What Is a Recession?
A recession is a period of an economic downturn that typically occurs when the GDP decreases for two or more consecutive quarters.
During a recession, businesses typically experience a decrease in profits, layoffs, and a decline in consumer spending. These factors negatively impact financial activity, which can then have a ripple effect on the entire economy.
A more thorough piece on what is a recession can be found on this page.
What Does "Cash Is King" Mean?
This means that cash is more convenient during a market meltdown. It is a safe-haven asset that can be used to pay for essential goods and services and cover unexpected expenses.
Cash means liquidity, so it can be quickly converted into goods and services without incurring a loss of value. This gives cash higher purchasing power over other financial instruments during economic-financial stress.
The Benefits of Having Cash on Hand
Cash is one of the most valuable assets either during recessionary periods or times of good economic health. Keeping it on hand can be beneficial in a variety of situations. Below are the advantages of having enough cash available.
Keeping liquid assets, such as cash, is smart during any economic climate. Cash also allows individuals and businesses to pay for goods and services while avoiding high interest rates.
Helps Business Stay Financially Stable
Cash reserves are especially useful to businesses during economic downturns. They can use cash to pay down debt during a recession, providing a financial cushion that can protect against defaulting on payments. Investors can go from weathering rough markets to going all-in on discounted investments to leverage cash to improve their financial positions.
Good for Emergencies
Emergency savings can be a lifesaver. In the event of an unexpected expense or emergency, an emergency fund can help you cover costs without having to rely on credit cards or loans, which can come with high-interest rates.
The Disadvantages of Having Cash on Hand
Having cash on hand can create a number of disadvantages. One major con is that cash isn’t a long-term investment. Other drawbacks of having available cash include:
Having cash leads to being more vulnerable to theft.
Having more money on hand leads to the temptation to spend more and save less.
The Health of the Stock Market
The stock market is a platform where investors can buy, sell, and trade securities, such as stocks, bonds, and mutual funds. It allows investors to have shares of ownership in publicly traded companies.
This entity helps to provide capital to businesses, which can be used to fund expansions and other investments. It also allows investors to make money by buying stocks at a low price and selling them when their value increases.
Also Read: How to Get Rich During a Recession
In the investment world, while volatile and unpredictable, the market is generally a strong and healthy indicator of economic stability and growth.
Is it Better to Invest in Stocks or Have a Cash Flow?
When it comes to investing and saving, it’s best to do both. We all understand how precious cash is, especially for daily living expenses. Liquid assets, such as cash savings, are ideal for dealing with unexpected or short-term expenditures.
Investing is also beneficial in building your financial portfolio. There are several ways to invest, including buying treasury bills, real estate, money market funds, or stocks. These methods are valuable to both older and younger investors.
If you want to boost the future of your financial health, it’s worth investing. While cash is king during a recession, investing in stocks typically performs better than cash in the longer term.
Is Having Too Much Cash Possible?
There is no definitive answer to how much cash is too much, as it depends on the individual’s financial situation and needs.
Some people need to have more cash on hand than others. However, having too much cash can lead to a lack of financial security and opportunities to invest and grow wealth.
If you have excess cash, there are options to secure it, such as money market and savings accounts.
Money Market Accounts
This is an interest-bearing account, similar to savings accounts, but it offers some checking account features as well.
This type of account gives you a medium to deposit your money. Your funds are kept safe with the bank, so you’re not carrying them around or storing them in an unsafe place.
If you’re looking for a higher annual percentage yield than a traditional account, a high-yield savings account is a good option.
The idea that cash is king during a recession stands true. There are advantages to keeping cash on hand during uncertain times. It’s a liquid asset that you can readily use for daily expenses.
However, in the long run, holding on to cash and not investing or taking other measures to secure future wealth may negatively affect your financial health.