Author Topic: How to protect the value of your cash in the bank? How much to have?  (Read 2842 times)

Offline BeachPete

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So with tax returns and savings I started thinking about how much cash should be fully liquid in a checking/savings/money market accounts?  I fear inflation will begin ramping up as the money from the QEs begins to really enter the market and the debit snowball becomes more obvious to the sheep.  We like having six months or more in cash stored away in the bank for emergencies and general savings but I am concerned that it's losing too much value in there.

I don't want to pull it all out and put it in metals, stores, etc but I also don't want to get caught when/if (more of when) inflation starts going parabolic. I also expect silver to have a significant pullback sometime soon to come back more inline with the 200 day moving avg.  If it does pull back, I'll put more there, but if not, what are some contingency plans to maintain value through stormy weather?

Offline tamo42

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #1 on: April 14, 2011, 10:45:44 AM »
Basically what you are asking is how to increase the reward while maintaining a very low risk AND keeping liquidity at the same time. Unfortunately, that's extremely difficult to do because investing into something that returns a yield to keep pace with inflation, whether it be a business, investment, or food production at your homestead will sacrifice that liquidity or risk/reward ratio.

So your options are essentially:
1, keep liquidity and low risk, but give up reward - keep the money in the bank/at home
2, keep low risk, increase reward, but give up liquidity - invest in your homestead or a business
3, keep liquidity, increase reward, but give up low risk - chase momentum plays in the capital markets

To be high reward, low risk, and liquid all at the same time requires a great deal of skill and can pretty much only be done through trading in the markets. For example, I made a 5% scalp on SLV this morning (and yesterday too) by using near month calls. However this was with a small portion of my portfolio, not my emergency fund.

Offline BeachPete

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #2 on: April 14, 2011, 12:06:13 PM »
Thanks for the input tamo42. 

I've got the investment side covered with self directed IRAs, physical assets, portfolios, etc.  I just wonder if I've got too much tied up in cash.  I wonder if it would be better to reduce my cash on hand/bank down to a three month cushion and move the rest into a better return against the dollar but slightly less liquid.

From the protection standpoint, Trailing Stops have been a lifesaver more than once. 

Offline boomer_sooner

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #3 on: April 27, 2011, 10:54:27 AM »
I wouldn't go any less liquid than CDs for an emergency fund.  MAYBE a conservative government bond fund would be OK as well, but I'd be very careful.  When you're dealing with small amounts of money, commissions and fees on trades can eat a lot of it.

I just think inflation is an inevitable cost of doing business as a saver.  I'd worry a lot less about losing its value in the bank than about whether stocks or gold will decline very quickly, potentially wiping out your money when you need it most.

Offline Asclepius

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #4 on: April 27, 2011, 06:59:59 PM »
Hmm. I wonder how all those people with money in the bank and stock market did during the great depression.

Why on earth would you expect a silver pullback??? I am racking my brain for scenarios where we would see a major pullback in physical silver and I can't think of a credible one. Have you seen the premiums for silver? The shortages? The forecasts for increased industrial demand? The tanking USD index? The exponential growth curve on the 5 year spot price chart? The silver shorters settling in cashola???

Offline boomer_sooner

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #5 on: April 27, 2011, 07:23:50 PM »
One reason to expect a silver pullback is simply the quick rise in silver prices lately.  Silver has gone from $26-30 in January to high forties now.  Fundamentals on silver might be very good, but I don't think it's unreasonable to think that it might track back to maybe $40 or so in the short term (say next six months), which was the price as recently as two weeks ago.  If you're depending on silver for an emergency fund, which is what the OP is asking about, that's a nearly 20% decline in the value of your holdings.  If silver can go up 50-60% in three and a half months, it can give back half of that value quickly.

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

Are these charts the kind of thing you'd depend on for your emergency fund?  You hold precious metals as a long term store of value.  If you bought silver in 2005 and held it till now, you made a killing.  But emergency funds aren't about making a killing and risking the fairly wild swings you see in short term precious metal markets.  Over the last five years, there are at least four times where you would have lost a quarter or more of your value in a single month in silver.  Not a big deal as a long term investor, but a damn big deal for emergency fund holdings.

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #6 on: April 27, 2011, 07:39:56 PM »
Hmm. I wonder how all those people with money in the bank and stock market did during the great depression.

Why on earth would you expect a silver pullback??? I am racking my brain for scenarios where we would see a major pullback in physical silver and I can't think of a credible one. Have you seen the premiums for silver? The shortages? The forecasts for increased industrial demand? The tanking USD index? The exponential growth curve on the 5 year spot price chart? The silver shorters settling in cashola???
We're wandering off topic here, but I can easily see a significant drop in silver prices down into the $20s again if we see a major stagflation recession.  Industrial demand will die off, people will be sell what they have to cover losses in the stock market and a need for cash.  I could also see gold back into the sub-$1000 range for the same reasons. 

Back on topic, I try to keep roughly six months cash between four different banks.  I also keep precious metals, but I wouldn't take right now as a buying opportunity, just another day in the markets.  Once you're over 6 months cash, I think diversification is the key and dollar cost averaging into precious metals, good energy ROI investments (photovoltaics, wind generator, new energy efficient windows or improving insulation, etc.), and short term bond funds (under 2 year average maturity).  While I have a pretty traditional portfolio for most of my 401k and IRA, after reading Crashproof and Black Swan, I'm interested in a smaller portion of my portfolio at risk, but a much higher risk for that portion.  At least that's the direction I want to move, but I have a lot more to learn before making a lot of changes to how I invest today.

Offline boomer_sooner

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Re: How to protect the value of your cash in the bank? How much to have?
« Reply #7 on: April 27, 2011, 08:42:00 PM »
And bank accounts in 1929 were a totally different proposition than bank accounts now.  I'm not exactly in love with the Federal Reserve system, but nothing will happen in a single day that will make your bank account totally worthless except for some pretty wild scenarios.  And if you're worried about that, keep it in a safe in your house.  You can never protect against all risk and anybody who seriously looks at precious metals as a total protection against short to medium term risk isn't honestly examining the facts.  PMs have their place, just not in your emergency fund.