Dale Jackson

Personal Finance Columnist, Payback Time

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Once upon a time, cash was king. Not any more. 

With the latest inflation gauge from Statistics Canada running at an annual rate of 7.7 per cent — the highest since 1983 — the loonies that Canadians had been accumulating in record amounts during the pandemic are eroding. 

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And so are the loonies in their investment portfolios as they struggle to generate returns that keep up with the cost of living. As an indicator of how much cash could be spoiling in retirement nest-eggs, the Investment Funds Institute of Canada (IFIC) reported a net $6.4 billion flowed out of mutual funds in May.

That doesn’t take into account the billions of cash dollars remaining in mutual funds with high cash weightings.

According to the latest BofA Securities Global Fund Manager Survey, cash levels for actively-managed funds fell to 5.6 per cent in May from 6.1 per cent the previous month, but other fund managers hoping to stem equity losses and salvage their performance bonuses could still be clinging to cash. (Securities regulators don’t require mutual funds to disclose current cash positions, so we will never know). 

If you find yourself cash-rich and inflation-poor, here are four ways to store its value.

1. PAY DOWN DEBT

Inflation is a global phenomenon right now and the best way for the world’s central banks to slay inflation is to cool the economy by raising interest rates. In this country, the Bank of Canada raised its trend-setting rate 50 basis points (half a percentage point) this month and is expected to raise it at least another 75 basis points next month.

That means borrowing rates will continue to climb for Canadians already mired in record household debt levels. Interest rates on credit card balances, for example, can reach 29 per cent.

In most cases, paying down debt is the best deployment of cash to keep your debt from growing at a faster pace. Even paying down debt at ten per cent will outpace inflation (at least for now). 

If your variable- or fixed-rate mortgage is at a manageable rate, it will eventually be heading up. Increasing payments now will keep more of your cash in home equity, and leave less for the banks when higher rates come.        

2. DRAIN YOUR EMERGENCY FUND 

Standard advice from banks to keep between three and six months of monthly expenses in cash for emergencies is looking iffy. In addition to being unrealistic for the average Canadian, letting inflation eat away at your cash reserves in a low-interest savings account only benefits the banks.

That cash can be better used as a hedge against inflation by paying down debt.

If an emergency does arise, homeowners can take a short-term loan from a home equity line of credit, which is usually the best going rate. 

Even a higher-interest consumer loan could make more sense in an emergency (provided it is paid off promptly).   

3. INVEST IN FIXED INCOME 

The silver lining from higher interest rates is higher yields on fixed income, such as bonds. Investing in fixed income is always a great way to balance risk against equity in a portfolio while generating income, and the payout will improve as interest rates rise.

Right now the yield on one-year guaranteed investment certificates (GICs) is approaching four per cent. Yields are higher for longer terms; but be careful not to get locked in because short-term yields are rising fast. 

GICs are ultimately guaranteed by the Government of Canada and yields can be expected to climb for riskier fixed income such as investment-grade corporate bonds.

If you’re looking for something even shorter term, yields on money market funds (which invest in short-term debt securities) are also expected to rise. One word of caution: yields on money market funds remain miserably low partly due to annual fees.

4. INVEST IN EQUITIES 

Putting your cash in equities in this volatile market can be risky, so it might be a good idea to speak with a qualified investment advisor.

If you are prepared to take that risk, the alternative to a dwindling cash store could be a robust rebound in the equity market if central bank rate hikes work to tame inflation.

An alternative to mutual funds with heavy or unknown cash weightings could also be equity exchange-traded funds. Like mutual funds, equity ETFs hold diversified baskets of stocks tied to an index, but rarely hold significant levels of cash. 

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.