You’re not the only one who thinks investing seems a little uncertain right now. You work hard to earn money and inflation is at its peak. Why take the risk of losing it, right? But the thing is you gotta do Something with your money, and many supposedly safe options also come with risks.
You do not believe me ? Let’s put these three “safe” money houses under the microscope and find out.
This one might not be that common, but I know someone who kept a big wad of cash in a safe for years. If you do this, you don’t have to worry about someone stealing it or your savings unexpectedly losing value like you would if you were investing it. But you don’t make any money either. The $5,000 you put in a safe will remain $5,000 forever.
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You know what’s not going to stay the same? How much that $5,000 will buy. Over time, inflation will continue to drive up the cost of living, which means you’ll have to spend more money later on to buy the same things you’re buying now. By leaving your money in a safe, it slowly but surely loses value.
2. Savings accounts
Savings accounts have a few advantages that safe deposit boxes do not. For one thing, your money is insured for up to $250,000 per depositor per type of bank account against bank failures. Another benefit is that you get a modest amount of interest on your savings, which is reflected in the annual percentage yield (APY) of the account. A higher APY translates into more money for you.
Banks can change their APYs at any time, and how much you earn depends, in part, on the bank you choose. You might only earn 0.01% with a physical bank account, or about $0.10 on a $1,000 balance in a year. On the other hand, an online savings account may offer you 1.50% or more right now. This would earn you $15 per year on an initial deposit of $1,000.
But even the best high-yield savings account APYs still can’t keep up with inflation. This is true even when inflation is not at its highest rate in decades. So you’re still going to lose purchasing power over time with a savings account, although this happens more slowly than if you kept your money in a safe.
That doesn’t mean savings accounts are useless, though. These are great choices for your emergency fund and the money you plan to spend over the next five years. You want this money somewhere accessible, where you can withdraw it at any time without fear of loss. But you shouldn’t keep long-term savings in a savings account.
3. Long term CD
Certificates of deposit (CDs) are similar to savings accounts in that they are insured against bank failures and offer an APY. Some CDs offer slightly higher APYs than savings accounts, but in exchange you have to promise not to touch your money for a certain period of time. This can be a few months for a short-term CD or several years for a long-term CD.
But here we run into the same problem we had with savings accounts. You may make money, but you will still lose purchasing power over time.
So where should you keep your money?
Investing is usually the best home for your long-term savings because it allows you to grow your wealth at a rate that often outpaces inflation. Yes, there is a chance that you will lose money in the short term, but in the long term the stock market is doing pretty well.
If you are worried, take steps to reduce your risk of investment loss. Be sure to diversify your money among at least 25 stocks in multiple market sectors. An index fund is a great way to do this with a single purchase. An index fund is a collection of stocks that you buy together, and it mimics the performance of a market index like the S&P 500. Many have historically high returns, and they are among the most affordable investments.
You should also think about your risk tolerance when investing. Keeping a lot of your money in stocks is smart when you’re young, but when you’re about to retire, too much exposure to stocks could set you up for huge losses. As a general rule, try to limit your share percentage to 110 minus your age. This means you would keep 80% of your money in stocks if you were 30, but only 70% if you were 40. Consider putting the rest in bonds or something less volatile.
Investing will always involve risk, but so will every decision you make with your money. Before deciding what to do, it’s important to objectively weigh the pros and cons of all your options.
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