Cash is Trash, Not King. Invest Your Cash To Save for Retirement and Build Wealth.
"Cash is king" is an expression often used in business and investing. While this may be the case in business, it is not true when it comes to saving for retirement. Even legendary investor and multi-billionaire Warren Buffett agrees that cash is a bad investment. Why do people stockpile cash?
Fear of losing money
With the stock market crash of 2008 still fresh in many people's minds, there is a tendency to stockpile cash for the ill-conceived notion and illusion of safely saving for retirement. In an article published on Bankrate, the millennial generation thinks that stockpiling cash is the best way to save for retirement. However, leaving cash in safe investment vehicles only provide meager returns.
Safe investments: benefits and disadvantages
Putting cash in safe investments is less risky, but the rewards are abysmal. Below are a few places where people deposit cash.
- Bank savings accounts: These pay slightly more than regular checking accounts. Since they are insured by the Federal Deposit Insurance Corporation (FDIC), money in such accounts are safe. However, because there is less risk of losing money, the returns are slim and laughable. Because you pay taxes on earnings from savings accounts, your returns are further reduced.
- Certificate of Deposits (CDs): CDs pay slightly more than savings accounts. Like savings accounts, they are insured by the Federal Deposit Insurance Corporation (FDIC). Although CDs offer many benefits, the drawbacks abound. There are usually penalties for early withdrawal of funds. You may also be required to pay taxes on interest earned on CDs.
- Money market funds, fixed annuities and U.S. Treasury Securities are other places where individuals store cash. For a more in-depth discussion of these saving vehicles, click here. For a list of investments that are protected by the FDIC, click here.
For the investor who is decades away from retirement, investing in securities (stocks, mutual funds, index funds, exchange traded funds) is the best way to save for retirement. They are riskier investments, but the long-term gains are maximal and realistic.
Stock market fluctuations: the gains outweigh the losses
Stock market fluctuations occur frequently. The S&P 500 index measures the value of the stocks of the 500 largest companies that trade on the New York Stock Exchange. It is usually used as a marker for how the US stock market is performing. Historical data show that stock market gains far outweigh the losses.
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- S&P 500 10-year total stock market returns (graph)
As you can see in the graph below, the S&P 500 delivers stunning returns over the long term.
- S&P 500 15-year total stock market returns (table)
As you can see in the table below, the S&P 500 continues to deliver relatively high returns over the long term.
The bottom line
Cash is trash, not king. Putting that money in securities is one of the best investment decisions an individual can make. It is true that stock market investments are riskier, but the rewards are far superior than safe investments (savings accounts, CDs, money market funds, etc). For the person who is decades away from retirement, low-cost index funds provides a cheap and excellent way to acquire wealth for retirement.
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