Inflation is once again outrunning wage growth, and that’s creating a problem for anyone sitting on too much cash.
The inflation rate climbed 0.6% in April, pushing the annual rate up to 3.8%, a three-year high (1). And consumer prices rose 3.8% year over year while inflation-adjusted hourly wage growth came in at 3.6%, according to CNN (2). That means the purchasing power of many Americans is slipping, even as they continue to earn more on paper.
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For savers, the challenge can be even more frustrating. If your savings account is earning less than the rate of inflation, your money is effectively losing value over time.
That’s why some financial advisors are rethinking where they keep their own cash. While many still prioritize safety and liquidity, they’re increasingly looking for places that can help preserve purchasing power instead of letting savings become what one advisor called “dead money.”
Advisors are cutting expenses before touching their investments
Andrew Fincher, certified financial planner at VLP Financial Advisers, told MarketWatch (3), “Inflation has definitely changed the way many people think about day-to-day spending and long-term planning.”
Fincher said that his plan of attack amid the inflation squeeze was to take a hard look at day-to-day spending.
“I’ve become more focused on cash flow efficiency — reviewing recurring expenses more closely, being more deliberate about large purchases and keeping a higher emphasis on value rather than convenience spending,” he said.
Andrew Herzog, certified financial planner at the Watchman Group, told MarketWatch that he was shifting what classified as a family need to save money. He canceled the weed treatment and lawn fertilization service they’d been using, since “pursuing a perfect lawn is no longer viable.”
Nicholas Bunio, certified financial planner at Retirement Wealth Advisors, told MarketWatch that he has been thinking twice about bigger purchases — and it’s been an ongoing process. “Last year, I put off getting a new set of irons, and this year I’m putting off buying a new telescope, as I’m an amateur astronomer,” Bunio told Marketwatch.
Bunio and his family have also shifted how they view dining out. “We don’t go out on random days anymore. Just birthdays, anniversaries, and Mother’s Day,” Bunio said. “Cutting back saves a few thousand bucks.”
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Where financial advisors are parking cash to fight inflation
When it comes to your savings and investments, you could also consider how your financial planning stacks up when it comes to inflation.
If the interest rate that you’re earning on your savings account is less than inflation, you’re losing money.
It’s a stressful thought, especially if you are saving for a short- or medium-term goal, and you want a low-risk option so that you can withdraw your money when you need it, without worrying about whether the market is in a downturn.
Short-term Treasury securities and I-bonds
Jeff Judge, certified financial planner at Chesapeake Financial Partners, told MarketWatch that he moved cash into low-risk, government-backed investments.
“I shifted some cash into shorter-duration Treasurys and I-bonds when rates were favorable,” Judge said. He noted that he “didn’t rebalance out of equities, but I made sure I wasn’t holding two years of cash in a savings account earning nothing. That’s dead money right now.”
Treasury bills and CDs
Another certified financial planner, Catherine Valega, with Green Bee Advisory, has been giving similar advice to her clients. “Make your cash and emergency savings work for you […] money markets, Treasury bills [and] CDs for that short term cash,” Valega told MarketWatch, noting that she recommends you “add more stocks as your time horizon extends beyond three years.”
Crypto
Certified financial planner Mike Casey, with AE Advisors, chooses to beat inflation by turning to crypto. “The thesis is straightforward: a fixed supply, significant institutional adoption and a truly neutral monetary asset,” Casey told MarketWatch. “I see bitcoin the way earlier generations viewed gold, a non-correlated store of value, sized appropriately within an overall allocation.”
While there’s no one-size-fits-all inflation hedge, the advisors interviewed by MarketWatch agree on one point: leaving large amounts of cash in a low-yield savings account could make it harder to keep up as rising prices continue to chip away at purchasing power.
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
Bureau of Labor Statistics (1); CNN (2); MarketWatch (3)
This article originally appeared on Moneywise.com under the title: ‘Dead money’: 3 financial advisors reveal where they’re parking cash as inflation hits a 3-year high
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
