Why Cash Is A Benchwarmer
If cash is king then inflation risk is Jamie Lannister
(If you don’t get the Game of Thrones reference don’t worry. Jamie Lannister is a character aka “The King Slayer.”)
What is inflation risk and why should you care?
Inflation Risk Defined
By definition, inflation risk is the rise of cost on goods/services over time. It adds to the reason why my $25 haircut in 2010 now costs $50.
I think we’ve all googled this before at some point. To share an example, $50 in 1975 would be worth about $300 today.
How Inflation Is Measured
You often see economists and CNBC go bananas when the Consumer Price Index (CPI) is released on a monthly basis. It’s the core benchmark for inflation and it measures a standard basket of products & services.
This basket of goods includes everything from food items, clothing, automobiles, education to rent. See the full list here.
How Inflation Is Created
It’s simple. Inflation is driven by more demand or less supply. Both lead to increasing the price of a good or service.
Homebuyers saw this when they were paying 20% above asking, with a cash offer, and waiving all inspections just to get an accepted offer.
Inflation vs. Cost of Living
Inflation is big picture, but cost of living has a different focus. Think of it more on an individual level, what a family needs (housing, food, taxes, etc.) to cover basic expenses. These two can often be confused with one another.
Most financial experts suggest an emergency fund that’s between 6-12 months of expenses. But your $100k emergency fund will likely not last as long in 2030.
Investopedia, January 2024
Want to dive deeper into inflation? Check out this Forbes article from earlier this year, which breaks it down in a great, simple fashion.
Cash is a benchwarmer. Each dollar has it’s own timeline and purpose. Too much or little cash will cost you more than you think.
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Key Takeaway from our CEO, Jack Boudreau
Liquidity is king. There are many ways to stay liquid (borrow, sell, etc.), but know your options, tax implications, and costs.
Plan accordingly or pay someone to do so.