Nothing is more important than having money during a recession; however, the days of stuffing cash under the mattress disappeared a while ago.
We need to become much more sophisticated with our money, resources, and assets. Cash is an asset, and we must value it as such.
Welcome back to the Preparing for a Recession series (#1, #2), where we put our money in places where it grows itself.
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Taking our money seriously. How do we take our money seriously when we have such a limited amount? The old saying is, “Every dollar counts.”
Creating a high-yield emergency fund and “captured cash flow” is a top priority before and during a recession. I will explain these and then discuss the products we must understand and use.
An emergency fund is a savings account we use only when absolutely necessary. In fact, our number one goal is to never use our emergency fund.
Captured cash flow is our real unexpected fund. We use it for emergencies, maintenance, and “new things” that arise.
For example, if I have a rental house, I would set aside $1,000 for any upcoming random events. However, it would have its own account outside of my emergency fund.
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High-yield savings vehicles. We have big plans for savings funds; however, they don’t involve standard savings accounts. Instead, we need high-yielding savings vehicles that can keep our money growing at all times.
We must use and understand five types of savings products: high-yield savings accounts, Series “I” Bonds, certificates of deposit, Treasury Bills, and money market funds.
I recently wrote an article comparing four of these products but forgot to add Series “I” Bonds. Now, I will correct my mistakes. Let’s discuss these five wonderful products in more detail.
High-yield savings account. I keep my entire emergency fund in my high-yield savings account. That way, it has its own place, and I don’t need to do any math.
I simply look at my Discover high-yield savings account (HYSA) to see how much I have in my emergency fund. HYSAs are the simplest of the five products because they are savings accounts that offer high yields.
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They can offer high yields because most HYSA banks are online-only, so they don’t have to worry about brick-and-mortar stores and employees.
I also have a high-yield checking account through Samsung Money and SoFi, but I don’t know how long rates will be competitive. Currently, they offer 4.25% interest on my checking account.
Series “I” Bonds. The government offers everyone Series “I” Bonds, but most people do not know about them. Buying them through the TreasuryDirect website can be cumbersome at first, but it isn’t rocket science.
I love Series “I” Bonds because they are the only products that calculate their interest rates based on inflation, not interest rates. The interest rates in Series “I” Bonds will spike if inflation spikes. Investors do not have to wait until the Federal Reserve raises interest rates to get higher rates.
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Investors can purchase up to $10,000 per year per social security number. That means a family of four can buy up to $40,000.
Although you can redeem your Series “I” Bonds quickly (after the first year), I would still include them in captured cash flow, not an emergency fund. You can find current Series “I” bond rates here.
Investors do not pay state tax on interest from Series “I” Bonds or treasuries in general. This is not a big deal for me in Florida, but it can have major implications in California and New York.
Certificates of deposit. Your local bank will offer certificates of deposit (CDs) to entice you to lock up your money for a short duration.
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CDs are a good way for savers to earn interest, especially if they only use standard savings accounts. However, with the advent of HYSAs, there isn’t a big need for CDs.
I have a friend who only implicitly trusts Navy Federal. Therefore, he would rather use a Navy Federal CD than a HYSA from an online bank.
I trust my Discover HYSA more than anything, so I don’t truly need a CD. However, it may be a good time to lock in a one-year CD with rates going down soon.
It’s a personal decision to consider CDs versus HYSAs, but I would still add CDs to my captured cash flow category.
Treasury Bills. Understanding Treasury Bills before the recession is vital because they are at the financial tip of the spear.
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Every big institutional investor, bank, hedge fund, and billionaire uses Treasury Bills to earn interest on short-term money. Treasury Bills are part of the world’s biggest and most significant market, the US Treasury Bond market.
Every day, thousands of bond traders fight for bond pricing on Treasuries. These prices are the most important in bond and stock markets because every other product (mortgages, dividend stocks, preferred shares) competes against Treasury interest rates.
We should also be part of the commotion. By creating a Treasury Bill ladder, we can fight to get the highest short-term rates directly for the government. We don’t want to depend on banks and credit unions to pass these savings rates to us.
Money Market Funds. Money Market Funds (MMFs) settle on the stock market after hours. Their goal is to keep their net asset value at $1 while earning the highest yields possible.
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To do this, MMF managers compose their funds with Treasuries, commercial papers, CDs, and banknotes to offer competitive yields.
If you invest in the stock market, it is a good idea to hold some of your captured cash flow in MMFs. Money market funds offer competitive rates for both taxable and non-taxable variants.
I like to keep a pot of money in MMF in each of my brokerage accounts. It thinks of them as HYSAs for the stock market.
High-Yield savings vs. a recession. What do all of these products mean in a recession? As I said earlier, “Every penny counts.”
Entering a recession will test everyone’s financial education. Each of these five categories will offer similar yet different rates. On the surface, they may seem close enough, but the few investors that look deeper will find hidden treasure.
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For example, in 2022, inflation spiked before the Federal Reserve increased interest rates. Series “I” Bonds offered 9.62% yields for six months, and everyone flocked to them. The people who already owned them were the winners.
There will be winners in the high-yield savings department during the recession. Who will offer the best rates if the Federal Reserve lowers rates to zero again? We don’t know yet.
Conclusion. The last time the Federal Funds rate went to zero, my Discover HYSA offered 0.4% interest. I bought 30-year treasury bonds at 1.5%. It was a nightmare.
Keeping that outcome in mind, I can leverage all of my resources to keep my yields as high as possible.
At the very least, I can evaluate my positions every month by comparing five diverse financial products and placing my money in the best one at a time.
Wealth is about caring for every dollar. Every dollar should have a job to reproduce itself. We must follow and understand these financial products to keep our money growing, even when the economy isn’t. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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