- One of my mistakes is one that many young people share: putting too much money 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.
- Learn more about Personal Finance Insider.
One of the biggest mistakes I made in my twenties is a mistake I still make today at 33: too much of my money is just in a savings account, and I don’t have no plan or strategy for what to do with it. money.
Turns out I’m not the only one – many young investors make the same mistake. According to a study by Personal Capital, the average person in their twenties holds 28% of their wealth in cash.
While many experts have differing opinions on what percentage of a person’s portfolio should be in cash (the common opinion is 10-20%), here are four reasons why keeping too much of your wealth in cash is a waste of money, according to financial advisors.
1. Your money loses value
Whenever I’m happy that my own financial portfolio is very cash rich I think about how keeping my money in a savings account means it loses value and that’s something I’m going to end up to regret.
Lauren Anastasio, director of financial advice and financial planner at Stash, says there’s an opportunity cost to holding on to cash.
“Even when inflation isn’t in the headlines, the value of your dollar continues to decline year after year,” Anastasio said. “$100 today simply won’t go as far as 10 years ago, and is undoubtedly more valuable now than it will be 10 years from now.”
She added that by investing it instead, you can reasonably expect an average annual rate of return of around 8%, and that holding too much cash means you’re missing out on growth that would keep you going — or even to exceed – inflation.
2. It’s a sign that you don’t have financial goals
While it makes me feel like I’m financially successful when I refresh my savings account and see a decent amount in it, it also indicates that I don’t have clarity about my future financial goals.
Evon Mendrin, a financial planner, says too much cash can be a sign that a person has no financial goals or priorities.
“You don’t know what to do with the money, so it sits idle,” Mendrin said. “If you clarify what your financial priorities are, you can have a better idea of what to do next with the extra money.”
So what should a person do instead? Mendrin recommends saving your money as a good next step.
“Along with your shorter-term bucket, include expenses you may need to pay for in the very short term, like an emergency fund,” Mendrin said. “Once that bucket is filled, think about your medium- and long-term financial goals. Invest the funds in accordance with those goals.”
He said that for long-term goals like retirement, you can invest funds more aggressively, like stocks and real estate, which should reliably outpace inflation over time. For mid-term goals, funds can still be invested in things like bonds.
3. You miss opportunities
While you might feel safe having plenty of money in your savings account, Nate Hansen, a CPA, said you’re missing out on opportunities by leaving it there.
“Holding endless money year after year instead of investing it is like never having the courage to ask your high school crush out on a date,” Hansen said. “While the stock market has rebounded around 10% over the long term, there is also the
aspect of funds invested over a long period of time.
Hansen says if you still want to keep a portion of your portfolio in very low-risk securities, consider Treasury Inflation-Protected Securities, or TIPS.
“These are US Treasury bonds that are adjusted for inflation based on the consumer price index, or CPI,” Hansen said. “TIPS protect against inflation by adjusting the bond’s actual face value for inflation, rather than adjusting the interest rate.”
4. It can be used to help offset taxes
Tony Matheson, a financial planner, recommends using excess cash to maximize retirement accounts and to help offset your taxes.
“If you’re not already taking advantage of all the limits on your 401(k) or Roth IRA, you’re paying more taxes than necessary,” Matheson said. “Then you can prepay the taxes that will be due in the years to come with a Roth conversion. If you have the money in a
Consider converting those dollars into a Roth IRA.”
“You will have to pay taxes now, but once that money is in a Roth IRA, it will never be taxed again — both growth and withdrawals,” he added.