Investing your money will help you offset inflation. Carlina Teteris/Getty Images
One of my mistakes is one that many young people make: putting too much money in savings accounts.
According to financial advisors, this is how your money depreciates over time due to inflation.
Setting financial goals, saving for retirement, and learning about basic investing can help.
One of the biggest mistakes I made in my 20s is a mistake I’m still making now, at 33: Too much of my money is in a savings account, and I don’t have a plan or strategy for what I should do with this money.
It turns out I’m not alone — many young investors are making the same mistake. According to a study by Personal Capital, the average person in their 20s has 28 percent of their wealth in cash.
While many experts have differing opinions on what percentage of a person’s portfolio should be cash (the conventional wisdom is 10-20 percent), here are four reasons why financial advisors say it’s a waste of money to put too much of one’s wealth in to hold cash.
1. Your money loses value
Whenever I’m content with the fact that my own financial portfolio is very cash-heavy, I think that keeping my money in a savings account means it’s going down in value — and that’s something I’ll regret later.
read too
Millennials in the US have fewer assets than they did a year ago – these are the reasons
Lauren Anastasio, head of financial advisory and financial planner at Stash, says there’s an opportunity cost to storing cash. “Even if inflation isn’t making headlines, the value of the dollar is declining every year,” says Anastasio. “$100 just doesn’t go as far today as it did 10 years ago, and it’s undoubtedly worth more today than it will in 10 years.”
She adds that investing the money can expect an average annual return of about 8 percent, and that if you hold too much cash, you’re missing out on the opportunity for a higher return.
2. It’s a sign that you don’t have financial goals
Even though I feel financially successful when I update my savings account and see a satisfactory amount, it’s also a sign that I don’t have clarity about my future financial goals.
read too
Key figure in Corona mask affair and ex-Siemens boss: next to whom the new Arsenal star Kai Havertz and Serge Gnabry invest in real estate
Evon Mendrin, a financial planner, says having too much cash can be a sign that a person doesn’t have financial goals or priorities. “You don’t know what to do with the money, so it sits idle,” Mendrin said. “Being clear about your financial priorities will help you better understand what to do next with the extra money.
So what should you do instead? Mendrin recommends investing the money in buckets.
“In the shortest-term buckets are expenses that you need to make in the near future, such as an emergency fund,” Mendrin said. “Once this area is filled, you should start thinking about your medium- and longer-term financial goals. Invest the funds according to these goals.”
For long-term goals like retirement, Mendrin said you can invest funds more aggressively, such as in stocks and real estate that are expected to reliably outperform inflation over time. For medium-term goals, funds can still be invested in things like bonds.
3. You miss your chances
Although you feel safe having lots of cash in your savings account, Nate Hansen, a certified public accountant, says you’re missing out on opportunities if you leave it there.
“Holding endless cash year after year instead of investing it is like never having the courage to ask your crush out in high school,” Hansen says. “While the stock market has a return of about 10 percent over the long term, there’s also the compound interest aspect of investing your money over a long period of time.”
read too
The wave of inflation is finally dying: Fewer companies want to raise prices and imports are even becoming significantly cheaper
If you still want to keep a portion of your portfolio in very low-risk securities, you should consider TIPS (Treasury Inflation-Protected Securities), says Hansen. “These are US Treasuries that are adjusted for inflation based on the Consumer Price Index (CPI),” Hansen said. “TIPS protect against inflation by adjusting the actual face value of the bond for inflation, rather than adjusting the interest rate.”
4. It can be used for tax equalization
Tony Matheson, a financial planner, recommends using excess cash to max out retirement accounts and reduce taxes. “If you don’t make full use of your 401(k) or Roth IRA, you’re paying more taxes than you need to,” Matheson said. “You can also pre-finance taxes that are due in future years by converting them into a Roth pension. If you have money in a rollover IRA, you should consider converting that money into a Roth IRA.”
Matheson adds, “You’re going to have to pay taxes now, but once the money is in a Roth IRA, it’s never going to be taxed again – both growth and withdrawals.”
This article was originally published in April 2022. Read the original article Business Insider.