Storage Facilities by Hunter Satterfield, CPA

Storage Facilities 

Where to keep your cash during periods of inflation or high interest rates depends on your priorities

by Hunter Satterfield, CPA

Unless you’ve been living in a hut in the Andes since the start of the pandemic, you know that inflation is sky-high. You’ve seen it in your supply prices. You’ve felt it at the pump. You may have even audibly gasped a few times at the grocery store checkout.

As of May 2022, the Consumer Price Index (CPI) is up 8.6% from the same time last year. That means Americans have roughly 8.6% less available spending money, give or take, than a year ago. Couple that with a jittery stock market that’s spooked by every interest rate hike and earnings report, plus war in Ukraine causing even more uncertainty, and it can feel really difficult to fi nd a safe place to park your cash savings that will return anything more than pocket change.

Do you risk your hard-saved cash in this roller coaster market? Do you lock it up in bonds or certificate of deposits (CDs) now that rates should be climbing? Do you keep it safely tucked away in a money market piggy bank that’s earning next to zero interest?

I get questions like these from my clients all the time. My answer? Investing your cash in times like these is less about where you put your money. It’s more about where you put your priorities.

Running the numbers
Before we talk about where to invest, it’s essential to look at how much you have and what you need the cash for. I suggest creating a 1–3–5 plan, where you split your cash into short-term, near-term and long-term buckets.

Short-term cash is your emergency fund. It consists of roughly six months to one year’s worth of cash to keep on hand in the event something goes wrong, like if you lose a source of income or get too sick to work for a period of time.

Near-term cash is money you know you’re going to spend in the next two to three years. You might be planning to remodel a kitchen or buy a car for a teenager in the next few years.

Long-term cash is money you won’t need for at least five years (and for most of us, even longer). This is the cash that you earmark for long-term growth, possibly as a bridge to retire early before your retirement accounts kick in.

Breaking cash down into a 1–3–5 scenario helps investors prioritize the risk versus the reward of earning larger returns across the total of their funds.

Short-term cash
For the vast majority of people, a good chunk of the cash we’re talking about here is our emergency fund—the cash we should keep in a safe, no-risk account that’s earning a few cents a month, if that.

During times of high inflation, investors are often tempted to move that short-term money into a vehicle that actually earns some real interest, but I caution my clients to resist that urge. In an inflationary cycle like we’re in now, yes, our short-term money is going to be worth less today than it was yesterday. But in this situation, you need to make an opportunity-cost decision, where you recognize that your short-term cash is going to be less valuable for a period of time and be OK with that.

This is what I call investing with purpose. The purpose of your emergency fund is to be there when you need it. Period, end of story. If it’s locked up in a two-year CD earning 1%, and you get sick and have to take significant time away from your practice, the opportunity to earn 1% is going to cost more than it’s worth.

Long-term cash
For long-term cash, I assign a five-year time period to the plan but everyone’s “long term” is going to be different. It could be five years if you’re closer to retirement, but it could be 10, 20 or more based on your age and when you plan to retire.

Regardless of the time frame, the principle remains the same. Where you invest your cash in times of inflation is not really any different from where you would invest it in any other economic climate. You look at your long-term retirement goals, then layer your cash accordingly to fit your overall investment strategy, including your 401(k)s, IRAs and other retirement savings vehicles.

For the long-term money, I’m telling my clients not to get caught up in things like inflation, interest rates or Russia. We have a strong economy. The market is going to be fine over the next 10 to 20 years, so mix your long-term cash into your larger investment strategy and let it do its thing.

Near-term cash
So now that short-term cash is stashed safely away and long-term cash is layered into a larger investment strategy, the only real decision investors need to make is where to put their near-term cash.

Near-term cash is really where the rubber meets the road. This is the only money you have that’s going to be affected by the volatility we are seeing.

Remember, this is money you know you’re going to spend in a few years on something that is most likely really important to you. Maybe it’s for your kids’ first car, a bucket list trip or your daughter’s wedding. Either way, it’s personal to you, and the key is to keep it that way. I tell my clients to name it, give it a purpose. Make it meaningful money because that’s exactly what it is. This not only helps you keep the money allocated to its purpose but also helps guide your thought process when looking for a place to invest it.

Because this is such a personal decision, and everyone has different access to investment vehicles, it’s virtually impossible to recommend one place to invest it over another without sitting down and talking through the variables.

Let’s look at two examples.

Scenario 1:
Age 45. Needs money to pay for twin daughters to attend college in three years. About half of the anticipated needs have been saved in a 529 plan, but short-term cash is allocated to other things and will not be able to cover the remainder.

In this type of situation, an advisor might recommend looking for a more stable investment, like a large-cap value fund composed of large companies that can produce dividends. Although there may not be a lot of growth in dividends, performance shouldn’t be based on returns alone. Performance is equal to returns and risk. Investing versus holding in cash allows you to either use the dividends to buy more stocks or use it as cash flow to help to pay for expenses related to college.

Scenario 2:
Age 67. Newly retired and anticipates the need to move aging parents into senior living in the next three to five years. Personal retirement savings is secure; however, short-term cash is on hand for monthly lifestyle needs rather than this unexpected family situation.

In this case, managing risk is essential. Investors should set low expectations on returns in exchange for peace of mind. Designing an allocation that has both bonds and equities can offer protection while still producing some returns when needed.

I can put on paper what you should do with your short- and long-term money, but I can’t generalize what to do with your near-term money; that needs to be a custom plan for you. That’s why talking to a CPA or trusted wealth advisor is so important in helping investors find the right vehicle that’s going to serve their unique needs.

For CWA clients, we have access to investments where, over a two-year period, you can get a return on your money that’s greater than just sitting in cash. Just make sure, in addition to the higher interest rate you’re getting, you also have enough liquidity to access that cash when you need it.

When you speak to an advisor, discuss:
  • Your near-term goals, plans and strategies.
  • How to invest your money to best protect it from volatility in the market, inflation and rising interest rates.

In summary
For investors fretting over their short-term money devaluing: Take a deep breath and try not to let it bother you. By all indications, this inflationary period looks to be transitory and should level out rather quickly.

For the long-term cash, it’s simple. Ask yourself, “Is this five-, 10- or 20-year money?” Then treat it as such and wrap it strategically into your other long-term investment mix.

For the near-term money, make it personal. Make it real. Then talk to an advisor about how to make it happen in a way that grows your money but keeps it suitably accessible.

Cain Watters is a registered investment advisor. Cain Watters only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets. No inference should be drawn that managed accounts will be profitable in the future or that the manager will be able to achieve its objectives. Past performance is not an indicator of future results. All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. Historical performance returns for investment indexes and/or categories, usually do not deduct transaction and/ or custodial charges or an advisory fee, which would decrease historical performance results. There are no assurances that an investor’s portfolio will match or exceed any specific benchmark.

Author Bio
Hunter Satterfield Hunter Satterfield is a partner and chief investment officer at Cain Watters & Associates. He received his Bachelor of Business Administration and Master of Professional Accounting degrees from The University of Texas at Austin. Before joining Cain Watters, Satterfield was a senior tax consultant at Ernst and Young, specializing in tax compliance and consulting with individuals, partnerships and corporations. He is a certified public accountant, an investment advisor representative and a cohost of the Accumulating Wealth Podcast.

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