- One of my mistakes is one shared by many young people: parking too much cash in savings accounts.
- According to financial advisors, your money will lose value over time due to inflation by doing this.
- Setting financial goals, saving for retirement, and learning more about basic investments can help.
- Read more from Personal Finance Insider.
One of the biggest mistakes I made when I was 20 is a mistake I’m still making now at 33: Too much of my cash is in a savings account and I don’t have a plan or strategy for what to do with it. money.
Turns out I’m not alone: Many young investors are making the same mistake. According to a study of Staff Capitalthe average 20-year-old has 28% of their wealth in cash.
While many experts have different opinions about what percentage of a person’s portfolio should be in cash (10-20% is the common opinion), here are four reasons why keeping a large portion of your wealth in cash is a good idea. waste of money, according to financial advisers.
1. Your money is losing value
Every time I realize that my own financial portfolio has a large amount of cash, I reflect on the fact that keeping my money in a savings account means that it is losing value and that is something I will regret.
Lauren Anastasio, Director of Financial Advisory and financial planner at Stash, he says holding cash has an opportunity cost.
“Even when inflation isn’t in the headlines, the value of your dollar continues to decline with each passing year,” Anastasio said. “$100 today just won’t go as far as it did 10 years ago, and it is certainly more valuable now than it will be 10 years from now.”
He added that by investing it instead, you could reasonably expect an average annual rate of return of around 8%, and that having too much cash means you’re missing out on the growth that would allow you. keep up with, or even beat, inflation.
2. It is a sign that you do not have financial goals
Although it makes me feel financially successful when I update my savings account and see a satisfactory amount in it, it also says that I am not clear about my future money goals.
Evon Mendrin, a financial plannersays that too much cash can be a sign that a person does not have financial goals or priorities.
“You don’t know what to do with the cash, so it sits idle,” Mendrin said. “By being clear about your financial priorities, you can have a better idea of what to do next with the extra money.”
So what is a person to do instead? Mendrin recommends wasting your money as a good next step.
“With your shorter-term deposit, include expenses you might need to pay for in the very short term, like an emergency fund,” Mendrin said. “Once that bucket is full, think about your medium- and long-term financial goals. Invest the funds in line with those goals.”
He said that for long-term goals like retirement, you can invest funds more aggressively, like stocks and real estate, which are expected to reliably outpace inflation over time. For medium-term goals, the funds can still be invested in things like bonds.
3. You are missing opportunities
While it may make you feel secure to have a large amount of cash in your savings account, Nate Hansen, a CPAHe said you’re missing out on opportunities by leaving it there.
“Holding cash endlessly year after year instead of investing it is like never having the courage to ask your crush out on a date in high school,” Hansen said. “While the stock market has returned about 10% over the long term, there is also the
aspect of funds invested over a long period of time.
Hansen says that if you still want to keep a portion of your portfolio in very low-risk securities, then consider Treasury Inflation-Protected Securities, or TIPS.
“These are US Treasuries that are adjusted for inflation based on the consumer price index, or CPI,” Hansen said. “TIPS protects against inflation by adjusting the real face value of the bond for inflation, rather than adjusting the interest rate.”
4. Can be used to help offset taxes
“If you’re not already tapping into the full limits of your 401(k) or Roth IRA, you’re paying more tax than you need to,” Matheson said. “Then you can prepay taxes that will be due in future years through a Roth conversion. If you have money in a
consider turning those dollars into a Roth IRA.
“You’ll have to pay taxes now, but once that money is in a Roth IRA, you’ll never pay taxes again, both growth and withdrawals,” he added.