PERSPECTIVES Is cash safer than securities? As a Dave Ramsey SmartVestor Pro, I recognize there are good reasons for cash reserves. In fact, I’ve recommended in this column that people strive to set aside six months of living expenses in liquid accounts. Since the pandemic hit, though, people have been hoarding cash. The problem with this strategy is inflation. Even CDs and money market accounts won’t keep you ahead of your cost of living. Those boasting the best rates right now are paying a paltry .55%. The inflation rate hit 7% in December of 2021. Do you see the problem here? Inflation affects your money’s worth There’s as much risk holding cash as there is investing in equities, bonds, and fixed income products. Sure, securities go up and down, but over time, provided you’re not trying to time the market, you can estimate returns. According to Goldman Sachs, that number is 9.2% over a ten-year period based on the past 140 years of trading. One thing is all but guaranteed. If you choose cash, or CDs, or money market accounts in the current climate, your money will be worth less against inflation. The Fed is expected to raise interest rates this year. That might bring your savings account returns up, but it’s unlikely they’ll get close to the inflation rate. Goldman Sachs estimates the Fed will raise interest rates to 4% by the end of this year. But that’s not the rate you get for putting your money in bank savings products. It’s also less than you’ll pay when you borrow money, which is going to get more expensive this year. You might want to lock those variable rate loans into fixed rate products if possible. The US personal saving rate, which is calculated by dividing household income by personal savings, hit a record 33.8% in April of last year, according to the Federal Reserve Bank of St. Louis. They cite the previous record as 17.3% in May of 1975. Numbers have come down since then, but they’re still higher than average. With so much disposable income, it makes sense to get strategic about making your money work for you.
FINANCIAL FIGURES By Michael Shelton Executive Summary: Money earning less than the inflation rate means your savings are shrinking. That’s not a good plan.
Keeping cash on the side is often driven by emotional decisions. So is pulling invested funds. If your goal is to accumulate a retirement nest egg or leave a legacy, it’s important to factor inflation into your decisions. Money earning less than the inflation rate means your savings are shrinking. That’s not a good plan.
about making “”Getyourstrategic money work.
Michael Shelton is a financial retirement counselor. Reach him at michael@discover360 Financial.com vbFRONT.com / MARCH 2022 u
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