You see it in the headlines and at the grocery store: Prices on food, gas, and other essentials are on the rise. Your cash balances are losing purchasing power in a big way.
Under these circ*mstances, it's natural to consider moving that cash into other assets. Those other assets could be gold, commodities, stocks, and even Bitcoin, depending on your outlook. But one legendary investor might tell you something completely different.
Buffett on cash reserves
Draining your cash reserves when inflation is running high can can make sense from a numbers perspective. But the move can also ultimately prove counterproductive to your finances. This is a point billionaire investor Warren Buffett has promoted recently: Low cash reserves harm your financial independence.
Buffett brought up the cash topic in his latest letter to shareholders of Berkshire Hathaway, the investment conglomerate he chairs. Referencing his preference to hold at least $30 billion in cash and cash equivalents at Berkshire, Buffett said, "We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends)."
Image source: Getty Images.
Investors need cash
Buffett's words apply as well to personal finance as they do to corporate finance. Having ample cash savings gives you flexibility to manage through unexpected circ*mstances -- without having to borrow from the bank or your great-aunt Susie.
Unexpected circ*mstances include job loss, car wrecks, home maintenance issues, and health problems. And specific to investors, there's the added dynamic of down markets to manage.
When the market's down, pulling money from investment accounts can be more expensive than borrowing. You'll get less value than you'd like on the liquidation. And you're left with a lower share count, which means less opportunity to benefit from an eventual recovery.
That's why investors need cash on hand, regardless of what's happening with inflation. In the face of emergencies, cash protects investment returns.
How much cash do you need?
Financial experts recommend having enough cash to cover three to six months of living expenses. You can refine this guideline with some quick analysis on your income and spending.
Questions to consider include:
- How stable is your income? Job loss is one of life's most challenging financial emergencies. If you work in a high-demand role or earn income outside your job (say from dividends or rents), you can manage with a lower cash balance. If you earn irregular income or your job outlook is unstable, target that six-month balance or higher.
- How long could you survive on unemployment income? If you spend a high percentage of your income today, unemployment won't come close to maintaining your lifestyle. In that scenario, a high cash balance is warranted.
- What are your insurance deductibles? At a minimum, you need enough cash to cover your largest insurance deductible.
- Do you have insurance gaps? You might live in a flood zone and not have flood insurance, for example. Know where your risks lie, and plan your cash balance accordingly.
Cash as insurance
Buffett values the role cash plays in his business, even if the return metrics don't quite make sense. Applying the same mindset to your own finances can improve your financial flexibility and protect your investment returns.
If the loss of purchasing power bothers you, think of it as an insurance premium -- one that's safeguarding your higher-growth assets from unexpected liquidation.
Catherine Brock has positions in Bitcoin. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Bitcoin. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
FAQs
So what's his strategy? In a nutshell, Buffett is a value investor. A bargain hunter, he searches for stocks that are valuable but not recognized as being valuable by most other buyers. Thus, he can buy a company when its stock prices are unreasonably low.
What does Warren Buffett say about cash? ›
Essentially, save first and foremost and once you've socked away as much as possible, then you can allow yourself to spend money. For his part, Buffett is all about spending in cash too. “I've got an American Express card, which I got in 1964,” he told Yahoo Finance. “But I pay cash 98% of the time.”
Is it bad to hold cash during inflation? ›
Any money that you plan to deploy for a short-term goal — one happening in the next one or two years — is best kept in cash, Benz notes. Because there is no chance of a decline in value, “cash is the best option, even if inflation is a risk factor,” she says.
What are two of Warren Buffett's investing strategies? ›
Warren Buffett is perhaps the best example of the power of long-term compounding. Buffett uses compound interest, dividend reinvestment, and the power of constantly reinvesting the operating cash flow generated by Berkshire's businesses to his advantage.
What is the best hedge against inflation? ›
5 Ways to Hedge Against Inflation
- Move Your Money into a High-Yield Savings Account. If you have your money stashed in a checking or basic savings account—or worse, at home—inflation erodes the value over time. ...
- Buy Treasury Bonds. ...
- Invest in the Stock Market. ...
- Diversify Your Portfolio. ...
- Explore Alternative Investments.
Debt-Oriented Investments
Bonds or debt funds that invest in bonds are linked closely to interest rates in the economy, which works closely with the inflation rates. If inflation rises, interest rates rise. Interest rates and bond prices move in opposite directions. Hence bond prices will fall in this case.
What Buffett rule is never lose money? ›
Warren Buffett 1930–
Rule No 1: never lose money. Rule No 2: never forget rule No 1. Investment must be rational; if you can't understand it, don't do it. It's only when the tide goes out that you learn who's been swimming naked.
What is the rule of money Warren Buffett? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”
What are the safest assets during war? ›
Some traditionally safe assets include precious metals like gold, silver, or platinum, or artwork. These are assets that will always retain their value, while they are also relatively easy to move around. However, during a crisis they have some significant disadvantages: They are easy to steal.
How much cash should you keep during inflation? ›
Not only are bank accounts paying very little interest, but keeping the bulk of your money in cash means you are losing purchasing power. Most experts say you should keep three to six months of your expenses in your emergency savings account. Anything above that could result in needlessly losing money to inflation.
What are the best investments to make during inflation?
- Real estate. Real estate is almost always an excellent investment and should be at the top of your list. ...
- Savings bonds. ...
- Stocks. ...
- Silver and gold. ...
- Commodities. ...
- Cryptocurrency.
With a bit of planning, you can ensure that your cash goes a long way and counter the effects of inflation.
- Check your interest rates. ...
- Consider opening a high yield savings account. ...
- Consider a money market account. ...
- Keep investing your long-term savings. ...
- Explore the bond market. ...
- Consider sticking short-term savings into a CD.
Some of his most important rules include:
- Rule 1: Never lose money. This is considered by many to be Buffett's most important rule and is the foundation of his investment philosophy. ...
- Rule 2: Focus on the long term. ...
- Rule 3: Know what you're investing in.
Warren Buffett's 10 Rules for Success
- Be Willing to Be Different. Don't base your decisions upon what everyone is saying or doing. ...
- Never Suck Your Thumb. ...
- Spell Out the Deal Before You Start. ...
- Watch Small Expenses. ...
- Limit What You Borrow. ...
- Be Persistent. ...
- Know When to Quit. ...
- Assess the Risks.
What is Warren Buffett's Investing Style? Warren Buffett is a famous proponent of value investing. Warren Buffett's investment style is to “buy ably-managed businesses, in whole or in part, that possess favorable economic characteristics.” We also look at his investment history and portfolio.
Where do you put cash during inflation? ›
What are the best investments to make during inflation?
- Real estate. Real estate is almost always an excellent investment and should be at the top of your list. ...
- Savings bonds. ...
- Stocks. ...
- Silver and gold. ...
- Commodities. ...
- Cryptocurrency.
What is Warren Buffet's retirement investment advice? Buffett recommends a long-term portfolio allocated 90% to S&P 500 index funds and 10% to diversified short-term bond funds for most investors.
How is a house a hedge against inflation? ›
Real estate has long been considered one of the best hedges against inflation because you can pay less for your home over time compared to what you may pay in rising rent. This can help your wallet as you pay more for everyday items.
Where to invest when inflation is high? ›
Top 6 Inflation Investments for the Future
- Equities. Equities generally offer a reliable haven during inflationary times. ...
- Real Estate. Real estate is another tried-and-true inflationary hedge. ...
- Commodities (Non-Gold) ...
- Treasury Inflation-Protected Securities (TIPS) ...
- Savings Bonds. ...
- Gold.
