Here’s Why Americans Turn To Cash When Recession Looms — but Is It the Right Choice?
Written by
Martin Dasko
Edited by
Levi Leidy
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According to a recent survey from Empower, around half (49%) of Americans admitted that they felt safer holding cash than other investments, with market uncertainty and the threat of a recession being the top reasons for doing so. The survey also found that 52% of Americans felt that “cash is king,” with 27% sharing that they carry cash daily.
Here are some of the different ways that cash was defined by those choosing to keep their funds liquid:
- Bills and coins: 98%
- Traditional savings accounts: 24%
- High-yield cash accounts: 18%
- Checks: 13%
- Money market accounts: 13%
In the rest of this article, we will explore why people use cash and whether it makes sense when there are fears of a possible recession on the horizon.
Why Do People Hold Cash?
There are a few main reasons that people will hold on to cash during uncertain economic times.
Cash Is More Liquid
“Holding cash during times of economic uncertainty, like a potential recession, can feel reassuring because it offers liquidity and a sense of control,” said Adam Paoli, the lead financial planner at Coltiva Wealth. “Many people fear the volatility of the stock market and want quick access to their money without the risk of seeing their investments lose value.”
Investments like real estate or stocks may not be as liquid as cash because you have to find a buyer for your asset. When people aren’t sure what’s to come in the economy, they may want liquid assets in their portfolio to feel better prepared.
Cash Feels Safer
“People can feel safer holding cash in uncertain times due to its immediate liquidity and protection from market fluctuations,” said J.D. Koontz, a banking expert at JD Koontz LLC. The one point you can’t deny about cash is that it won’t fluctuate as stocks do, so it makes sense that people would want to hold on to it instead of worrying about their savings dropping.
Paoli noted that cash can act as a safety net, allowing individuals to cover immediate expenses if their income is affected by layoffs or reduced hours. For many, cash allows them to ensure that they don’t have to rely on credit to get through market swings when they don’t have access to funds to cover the bills.
Cash Is Helpful During Emergencies
“Cash is also critical during emergencies, like natural disasters, when electronic payment systems might fail due to power outages or internet issues,” noted Koontz. “[…] Having cash ensures you can still make essential purchases and avoid ATM fees.”
With multiple drastic scenarios impacting consumers over the past few years, it makes sense that they would want to hold on to cash just to feel prepared for what may come next.
Is Cash Really the Best Choice During a Recession?
There are two major issues with relying on cash during times of high inflation and market uncertainty.
Cash Can Lose Its Value
“While cash provides short-term security, it’s important to remember that inflation can erode its value,” said Koontz.
The harsh reality of holding cash or a liquid asset similar to it is that you’re likely not earning any interest on your money. Even though cash can provide security, by keeping a significant amount of money in physical cash or an account that isn’t earning interest, your wealth isn’t growing.
You Miss Out on Diversification
“Diversifying can help maintain long-term financial health while still offering some protection against economic uncertainty,” said Paoli.
When you have all of your savings in cash, you don’t have a diversified portfolio, which means you could be missing out on substantial long-term returns.
What Should You Do?
Koontz shared the following advice if you’re uncertain about holding cash compared to investing your money during uncertain times: “A balanced approach — holding cash for emergencies while investing in low-risk assets like a money market or high-yield savings account — can better protect finances in uncertain times.”
Paoli added, “A more balanced approach might include holding enough cash for emergencies but still keeping some investments in less risky assets like bonds, which tend to be more stable during recessions.”
It’s worth pointing out that during periods of high inflation, the Fed battles the increased prices by raising interest rates, which leads to the cost of borrowing money going up, impacting consumers on different levels. While the goal of the Fed is to restore the balance of supply and demand by raising rates to arrive at a soft landing, there’s the possibility that these actions could tip the economy into a recession.
However, it’s worth noting that a recession hasn’t been declared despite signs that one was coming. Additionally, the Fed has stopped rate hikes and recently cut interest rates for the first time in years. This means that taking rash actions like selling all of your investments and relying 100% on cash could hurt your finances in the long run. As always, it’s important that you try to speak with a financial advisor to ensure that you’re making the best moves for your personal situation.
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