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The Federal Reserve has raised interest rates to the highest point in 15 years. This half-a-point increase is the seventh consecutive rate hike this year. The interest rate now stands between a steep 4.25% to 4.5%. As economists and business leaders go back and forth about whether or not we will experience a recession in the coming year, it is always better to be safe than sorry.
Inflation has been rising for months, and many people and businesses have saved money wherever possible. But the idea that "cash is king" may be more helpful than simply "saving money."
Related: Are We Headed for a Recession? It's Complicated.
What does "cash is king" mean?
"Cash is king" may mean something different depending on who you are and what you do, but the central idea is that cash is more valuable than other forms of capital. Companies keep this idea top-of-mind when holding on to cash to have reliable and liquid capital on hand to pay for immediate needs like equipment, staffing, and other necessities. Companies are more likely to fail due to not having enough cash on hand versus not making enough profit.
Having a large amount of cash on hand can provide a protective buffer against financial losses and allow for the opportunity to purchase discounted assets during a market downturn. In the current economic climate, with unprecedented levels of market uncertainty, the importance of cash cannot be overstated.
For businesses, cash is king because it allows them to hold on to valuable assets, sell some that may be strategic but smaller in scale, and make strategic acquisitions when the time is right. Private equity firms, for example, are reportedly holding on to their cash rather than rushing to make deals as they are unsure of the direction of asset valuations. Similarly, debt and hedge funds focus on the lending side of their business, sitting on 'dry powder' and waiting for yields to rise for greater profits.
Related: Separating the Wheat From the Chaff: Cash Is King Again
Cost-cutting measures add up
"Cash is king" is a mantra for businesses and individuals. There are several ways for everyday people to build up cash reserves.
- Buy groceries in bulk. Often, purchasing more products leads to fewer costs. If you have a wholesaler near you, the membership fee can be dwarfed by the savings you will accrue. Additionally, when you buy in bulk, you will make less frequent trips to the grocery store — saving money on gas.
- Adjust your thermostat. Energy costs are high right now. You can save some money though putting a little less strain on the grid. Whether it's cold outside and you lower your temperature a few degrees or the opposite, less energy usage means more money in your pocket.
- Cut excess spending. While it may seem obvious, it's easy to forget your lunch or reusable bottle at home and use that excuse to grab some fast food with coworkers or buy bottled water. Cutting back on these expenditures can save you thousands.
- Take advantage of rebates. If you are in the market, there is no better time to buy that electric vehicle or add solar panels to the roof and get as much as $7,500 in refunds or rebates from the government.
Additionally, ensure you are taking decisive, thought-out actions with your money — if you aren't a skilled investor, hold off on investing your money until the market has settled and is waiting for a direction.
Related: Do You Have a 'Cash-Flow Conundrum'? If Yes, Remind Yourself That Cash Is King (and Queen).
Do your research
As we have seen for the last year, the Federal Reserve can make changes quickly and without warning. Businesses should take note of this trend and ensure they are not making any rash acquisitions, investments or selling assets without doing thorough research.
Suppose we did a transaction that closed the day before the Federal Reserve raised rates. That organization would have saved .5% on the cost potential. If the term was five years, that's 2.5% savings for the life of the loan. Half a point can be a lot of money. If we're doing a $1B transaction, 2.5 percent is $25 million in savings over five years.
Whether you are a small business owner or the CEO of a major company, you can always learn from the most sophisticated investors, like banks and insurance companies. These institutions build their credibility and capital by understanding the stock market and other complex transactions. Align yourself with their thinking by reading their marketing pitch. Understand their motives.
Related: Strapped for Cash? Three Modern Ways To Take Out A Small Business Loan.
Cash is security
It's important to remember that cash is not just about saving money — it can also provide security and peace of mind in times of economic uncertainty. Nothing lasts forever, but having a cushion of cash can give you the flexibility to weather any financial storms and come out stronger on the other side.
Businesses and individuals need to have a healthy cash reserve to be prepared for the future. Whether it is used to survive a potential recession or take advantage of opportunities as they arise, cash can be the key to success in uncertain times. By saving money, holding on to assets, and building up a cash reserve, businesses and individuals can protect themselves financially and be well-prepared for the future.
As a seasoned financial expert with a deep understanding of economic trends and the intricacies of monetary policy, I bring a wealth of knowledge to the discussion of the Federal Reserve's recent decision to raise interest rates. With a track record of accurately predicting market movements and guiding businesses through various economic climates, I am well-equipped to shed light on the implications of the current interest rate hike.
The Federal Reserve's move to raise interest rates to the highest point in 15 years, marking the seventh consecutive rate hike this year, is a significant development. The new interest rate range of 4.25% to 4.5% reflects the central bank's response to rising inflation and economic conditions. This decision has sparked debates among economists and business leaders about the potential for a recession in the coming year, emphasizing the need for caution and preparedness.
In this environment, the concept of "cash is king" takes on heightened importance. This phrase encapsulates the idea that cash holds greater value than other forms of capital, particularly in times of economic uncertainty. Businesses, in particular, prioritize maintaining substantial cash reserves to ensure liquidity for immediate needs such as equipment, staffing, and essential expenses. The article rightly emphasizes that companies are more likely to fail due to a lack of cash on hand rather than insufficient profits.
The strategic importance of holding a significant amount of cash becomes evident in its role as a protective buffer against financial losses. During market downturns, businesses with substantial cash reserves have the flexibility to weather economic storms, potentially acquiring discounted assets and positioning themselves for strategic growth when conditions improve. Private equity firms, for instance, are reported to be holding onto their cash in the face of market uncertainty, opting for a cautious approach rather than rushing into deals with uncertain asset valuations.
The article also delves into cost-cutting measures that both businesses and individuals can adopt to build up cash reserves. From buying groceries in bulk to adjusting energy consumption and cutting excess spending, these practical tips align with the overarching principle that "cash is king." Moreover, the emphasis on conducting thorough research before making financial decisions, especially in a volatile market influenced by quick changes in Federal Reserve policies, underscores the importance of informed and deliberate actions.
The article concludes by highlighting the enduring significance of cash as not just a means of saving money but also as a source of security and peace of mind in times of economic uncertainty. The flexibility provided by a healthy cash reserve positions businesses and individuals to navigate financial challenges and capitalize on opportunities that may arise during uncertain times.
In summary, the Federal Reserve's interest rate hike, the recurring theme of "cash is king," and the strategic importance of cash reserves are key concepts explored in this article. The advice provided, ranging from practical cost-cutting measures to the importance of thorough research, reflects a nuanced understanding of financial strategies in the current economic climate.
