Should I keep my money in cash, savings, or investments?

Financial insecurity and the fear of losing our money can keep us from building wealth. I remember when I was just starting out learning about personal finance, I was terrified to part with my cash. The thought of taking my limited, hard-earned cash out of my checking account and investing it sounded risky.

I mean, what if I lost it all?

When I thought of the stock market, I thought of fancy finance guys in suits screaming, “BUY!” “SELL!” “TRADE!” in the pits at the New York Stock Exchange on Wall Street. So stereotypical, I know…but I thought that’s what it was like, and I know others do too!

Horror stories came to mind about millionaires losing everything 🙀 I didn’t want to be one of those people! Those headlines are catchy AF.

But after hours of research, hundreds of podcasts and videos, and too many books to count, I realized investing doesn’t have to be this super scary thing! Why is that? Because the US stock market ALWAYS recovers. It’s true! The US stock market has never not recovered. So, as long as you are a long-term investor and investing in the right things, you don’t have to be terrified of losing your money.

Not only did I learn that, but I also discovered the power of compound interest. Let me tell you a little something about compound interest: It is truly the 8th wonder of the world.

Today I’m going to show you what happens to your $$$ when you cash that check and leave it in the bank versus depositing it into a high-yield savings account or investing it and what compound interest can do for you!

How much money should I keep liquid?

While having some cash is necessary for bills, spending money, and short-term goals, having too much is also bad. 

Your money slowly loses its value over time due to this lil ‘ol thing called inflation (womp, womp). So, think about squirreling your money away in your checking account for all 35+ years of your career only to get to retirement and find out you actually have less to live on than you put in. 🥴

I know it feels like a risk to part with your cash, but when it sits stagnant in your checking account, you are working for your money more than your money is working for you. 

Let’s look at an example:

Mandy starts with $20,000 in cash (we will never know how she got such a large lump sum, and it might be better not to ask…). 

Mandy just sits on that cash. All of that dough in her bank account makes her feel like an absolute queen 👑 But despite showing the willpower of a saint and not touching it for 10 years, Mandy’s money is now only worth $14,748. 

After 20 years, it’s only worth $10,876.

After 30, the situation is even worse…her initial $20,000 is now only worth $8,020.

I know you’re thinking, Amanda, that makes no sense! And I hear you. But this is the negative power of inflation. Over time, our dollar becomes worth less and less. 

The average rate of inflation is 2-3%. That means the dollar’s value decreases by 2-3% each year. We used 3% in this example because some years are higher than others.

So, all you cash hoarders out there, I see you 👀, and so does inflation.

How money grows in a High-Yield Savings Account

A high-yield savings account (HYSA) is a savings account on steroids 🏋🏼‍♀️ Interest rates average 2% ish, though with the economy today, we’re rocking some at like 4.5%+! Because these accounts yield much higher interest, they are better for your cash than a typical savings account at your local bank, where you earn .01% interest. EWWW! However, we should only keep our emergency fund and sinking funds (money for short-term goals less than five years away) here.

Note: A common question is, “This sounds like a scam. Why do they pay more than a regular big-box bank?” It is not a scam! They can do this because these are ONLINE banks, my friend! That means they don’t have the overhead of a brick-and-mortar and can pass some of those savings onto us. The more you know🌈.

Let’s return to the example with Mandy and her lump sum of cash:

Let’s say that this time, she starts out by putting her $20k into a HYSA instead of leaving it in her checking account. After depositing it into a HYSA with a 2% interest rate and assuming 3% inflation, her $20k is now worth $18,087 after ten years.

After 20 years, it’s worth $16,358.

After 30 years, it's worth $14,794. 

So, while things are slightly better for her, her dollar is still decreasing in value. Booooo.

How money grows in the stock market

How can you make your money work for you? By investing it! You cannot save your way to wealth like we just talked about because inflation decreases the value of our dollar. We must invest today so compound interest can do its job and grow wealth passively.

One last look at Mandy:

So, instead of keeping her cash or depositing it into a HYSA, Mandy takes her $20k and invests it. 

Mandy is a member of the Wolfe Pack. She knows she can’t suffer from analysis paralysis, so she takes the plunge and invests her money in an S&P 500 index fund. Now, this index fund tracks the top 500ish companies in the stock market.

On average, the stock market has returned 10-11% a year (10.9% to be exact). Some years are way higher, others are much lower, but over the last decade, 20 years, 30 years, and in the stock market's history - it levels out, and the average return is 10-11%.

We are going to use an 8% interest rate for this example because we are taking into account 3% inflation (11% - 3% = 8%).

Without a single additional dollar invested, after 10 years, her $20k has become $43,178.

After 20 years, it’s worth $93,219.

At the 30-year mark, it’s worth $201,253. 

Way to go, Mandy! 🎉

Saving for retirement

When it comes to saving for retirement (or any of life’s big purchases, for that matter), amassing a boatload of cash alone isn’t going to cut it (unless you win the lottery or have an unknown relative who leaves you a mass fortune). 

Investment accounts help your money yield a higher rate of return than saving it alone can do. I know this goes against what we may have learned growing up! But doing this not only leaves you with more than your original investment, but it also offers a buffer for your dollar from inflation. 

Investing is surprisingly easy. I mean it! It’s not hard—it’s just new to you. Once you start, your only regret will be not starting sooner! The longer we wait to invest, the less time our money has to work, and the less our money grows.

How to get started investing

If you’re ready to get started investing, I invite you to attend my free investing party! I’m going to explain the basics of how compound interest works, how to get over the fear of losing all your money when it comes to investing, and show you how to start investing with just $1 (yes, you can get started with as little as $1)! 

And best of all? This party has no cover charge! FREE PARTY WHAT WHAT?!

Hope to see you there!