top of page

Why Cash is Not King: A Realistic Approach to Saving and Investing

It's a common belief to keep your savings in cash or in a bank for safety. But here's the catch: even with interest rates on savings and time deposits, your money isn't keeping up with inflation. Inflation is like an invisible tax on your cash. Imagine you’ve got a pile of cash stashed away. It feels good, right? But while your cash sits there, inflation is slowly creeping in like a fog, eroding its value. What you could buy with that cash today, you'll be able to afford less with it tomorrow. That’s the reality of inflation.



Cash and Inflation: An Unfavorable Alliance

For instance, if inflation is at 3% and your savings account only gives you a 1% return, you're effectively losing 2% in purchasing power every year. It's like going to the store and finding out that everything's slightly more expensive than last year.


Enter the World of Investments

Here’s where it gets exciting. Investing is like planting a seed and watching it grow. Sure, it takes time and a bit of risk, but the potential rewards are substantial. You’re not just beating inflation; you're setting yourself up for a better financial future.


Investing as a Defense Against Inflation

Investing your money can potentially yield returns that not only match but also surpass the rate of inflation. This is crucial in maintaining or increasing the purchasing power of your savings. Different investment forms come with their own sets of risks and potential returns.


Cash Investments

When it comes to cash investments, there are several options that offer more benefits than simply holding cash in a savings account. These investments typically provide higher liquidity and some yield, although they may offer lower returns compared to stocks or bonds. Here are a few examples:


Money Market Funds

  • Description: Money market funds are mutual funds that invest in short-term debt securities like Treasury bills and commercial paper.

  • Benefits: They offer higher liquidity and usually come with a lower risk compared to other investments. The returns are typically higher than those of a regular savings account but lower than long-term investment options.

 

Certificates of Deposit (CDs)

  • Description: CDs are time deposits offered by banks with a fixed term, and they usually offer a higher interest rate than savings accounts.

  • Benefits: They provide a guaranteed return and are FDIC insured for up to $250,000. However, they are less liquid since funds are locked in for a specific period.

 

Treasury Bills

  • Description: Treasury bills (T-bills) are short-term government securities with maturities ranging from a few days to 52 weeks.

  • Benefits: They are considered very safe since they are backed by the U.S. government. They can be purchased at a discount to their face value and redeemed at full value upon maturity.

 

High-Yield Savings Accounts

  • Description: These are savings accounts offered by banks or credit unions, typically providing higher interest rates than traditional savings accounts.

  • Benefits: They offer safety, liquidity, and a higher yield, making them suitable for short-term savings or emergency funds.

 

Ultra-Short Bond Funds

  • Description: These are mutual funds that invest in corporate and government bonds with very short maturities.

  • Benefits: They offer a higher yield than money market funds, with slightly higher risk. They are suitable for investors looking for a balance between yield and safety.

 

Floating Rate Funds

  • Description: These funds invest in floating rate loans and bonds.

  • Benefits: The interest rates on these loans adjust periodically, which can provide some protection against rising interest rates. They generally offer higher yields than money market funds.


Each of these cash investment options has its own risk profile, liquidity level, and potential for returns. They can be excellent choices for investors looking to park their cash temporarily while earning some returns or for those seeking to maintain a portion of their portfolio in lower-risk, liquid assets. It's important for investors to assess their individual financial goals, risk tolerance, and investment timeline when considering these options.


Diversification is Key

You’ve probably heard this before, but it’s worth repeating: Don’t put all your eggs in one basket. Mix it up with stocks, bonds, and maybe some real estate. This way, if one type of investment underperforms, the others can help balance things out.


Stocks: High Returns with Higher Risk

  • Growth Potential: Stocks offer significant growth potential, as shareholders directly benefit from a company's success.

  • Dividends: Dividend-paying stocks are appealing for generating regular income, which can be reinvested or used as steady cash flow.

  • Risk Factor: The stock market can be volatile; stock prices fluctuate, posing a risk of loss. Research and diversification are vital in managing this risk.


Bonds: The Safer Harbor

  • Stability: Bonds are generally stable and provide a predictable income stream, making them a safer option than stocks.

  • Types of Bonds: Includes government bonds, municipal bonds, and corporate bonds, each with different risk levels.

  • Interest Rates Impact: Bond prices are inversely related to interest rates; when rates go up, bond prices typically go down, and vice versa.


Mutual Funds: Professional Management and Diversification

  • Managed Diversification: Funds are managed by professionals who allocate investments across a diverse range of assets.

  • Accessibility: Mutual funds allow investors to buy into a large portfolio of assets with a smaller investment amount.

  • Types: Includes index funds, actively managed funds, and sector-specific funds, each catering to different investment strategies and risk tolerances.


Real Estate: Alternative Real Estate Investments

  • REITs: These are companies that own and manage income-generating properties, offering high liquidity and typically higher dividend yields.

  • Real Estate Crowdfunding: This approach allows investors to pool funds for specific real estate projects, offering potential for higher returns but with greater risk and less liquidity.

  • Real Estate Mutual Funds and ETFs: These funds invest in portfolios of real estate companies and REITs, offering diversification and professional management.

  • Online Real Estate Platforms: Platforms like Fundrise and RealtyMogul offer a variety of real estate investment opportunities with lower minimum investments.


How to get started: Investment Apps for Beginners

For those new to investing, various investment apps make the process more accessible and less intimidating. These apps often feature user-friendly interfaces and educational resources. Many also offer robo-advisors—automated investment platforms that create and manage a diversified portfolio based on your risk tolerance and investment goals.


Self-Managed Investment Apps

  • Robinhood: Known for commission-free trades and a user-friendly interface, great for beginners. It offers stocks, ETFs, options, and cryptocurrency trading.

  • E*TRADE: Offers a wide range of investment choices including stocks, bonds, ETFs, and mutual funds, with extensive research tools and resources.

  • TD Ameritrade: Provides comprehensive research tools and educational resources, with no minimum deposit and no commission for online stock, ETF, and option trades.


Investment Apps with Robo-Advisors

  • Wealthfront: Features automated investment management using Modern Portfolio Theory, with tax-loss harvesting and a low account minimum.

  • Betterment: Offers personalized portfolio management based on individual risk tolerance and includes socially responsible investing options.

  • SoFi Invest: Provides automated investing with no management fees and access to certified financial planners.


By leveraging these tools, investors can navigate the financial markets more confidently, whether they are seasoned traders or newcomers to the world of investing.


Bottom Line

Keeping all your money in cash might feel safe, but it’s akin to sitting in a boat with a slow leak. Investing might rock the boat more, but it’s your ticket to reaching new financial shores. So, grab your financial oar and start paddling. Let's make your money work for you!


Comments


bottom of page