Now, things are going to get tough for “chicken money” holders. Your self-discipline is about to be tested as short-term rates decline, while inflation remains steady. It’s easy to set money aside to earn interest when rates are high. But as rates drop, you will be tempted to take just a bit more risk to earn more. And if you can’t resist that temptation, it could be the downfall of your entire financial plan.

What IS Chicken Money?
First, a reminder that “chicken money” is not a function of age or wealth. No matter what your personal finances, everyone should have some money set aside to let you sleep at night, no matter how the stock market fluctuates.

My most recent column discussed the impact of a bear market, which is defined as a 20% decline in the popular averages. But there have been several bear markets that dropped more than 40% — and didn’t rebound for years. If you’re younger, that shouldn’t scare you. After all, we keep making all-time stock market highs as I write this. So every decline, in retrospect, was a buying opportunity. That’s how you’ve grown your money in your 40l(k) plan.

Chicken money is money you don’t expose to the stock market or crypto or other risky investments. It can be money that you need soon – such as college tuition for your high school junior. It can be the down payment for that home you want to buy. Or it can be money that you know you’ll need to live on during your retirement, which is fast approaching. It can be a smaller or larger percentage of your net worth, depending on your time horizon and on your overall financial picture.

The key ingredient in designating a portion of your money as “chicken money” is realizing it is money you simply can’t afford to lose. And the time to figure that out is before you become panicked over losses that are in progress.

Chicken Money Investments
Chicken money belongs in FDIC-insured bank money market accounts or short- term CDs with maturities of less than two years. It belongs in short-term U.S. Treasury Bills. (See the article on How to Buy T-bills at TerrySavage.com.) Money in government money market mutual funds at the major fund companies also qualifies as a safe, chicken money investment.

Beyond those safe havens, there’s always a degree of risk. Other investments can be quite profitable. But they don’t qualify as chicken money. The key truth about these safe investments is that you won’t grow rich in them – but you won’t grow poor, either!
Historically, these safe investments have paid just a bit above the inflation rate. If you must pay taxes on the interest you earn, you might only break even with inflation. But always remember the mantra of the chicken money investor:

I’m not so concerned about the return ON my money as I am about the return OF my money!

The Challenge of Falling Rates
Interest rates on these short-term investments are highly influenced by the Federal Reserve, which sets the overnight lending rate for banks. And as you’ve seen in the headlines, the Fed has been cutting rates, and is forecast to continue doing so.

Banks set rates to attract deposits. When market rates are rising, bank CD rates tend to lag. They know that most savers will automatically roll over their CDs at low rates. (You can search for the highest CD rates at Bankrate.com.)

But when interest rates are falling in the weekly T-bill auctions, banks cut their short-term CD rates quickly. And that’s just what’s been happening. Earlier this year, you could get 4.5% interest on 6-month T-bills, and almost as much (or more in some cases) on bank CDs. But in recent weeks, the 6-month T-bill rate has dropped to about 3.6%.

Many people who count on earning interest to supplement their other income, will see their income drop significantly. And that’s where the temptation comes in. Short-term rates are now only slightly over the inflation rate. Shrinking income will make you vulnerable to pitches for other investment products.

But having “chicken money” on the sidelines offers two benefits. The first is you’ll sleep better at night when everyone else is worried about stock market losses. And the second is that you’ll have the cash to buy bargains when everyone else is selling.

Perhaps that’s why famed investor Warren Buffett has currently amassed a $380 billion hoard of T-bills and chicken money. His funds now own more T-bills than even the Federal Reserve! Don’t you think you should have a bit more chicken money too? That’s The Savage Truth.