Yahoo Finance Why simply saving cash can mean you’re going backwards financially
Whenever I talk about investing, I'm almost guaranteed to be asked two questions: Is now the right time to invest or should I wait until the market is better? And, I don't have much to invest, is it worth it?
The answers are often, now and yes.
That's because we don't have a crystal ball and can't predict what's going to happen in the future when it comes to investing highs and lows.
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If we think back to March 2020 when COVID first crashed the party, many economists predicted that the Australian housing market would drop 20-40 per cent.
At the time, that seemed like a fair prediction. And while there was an initial retraction in some major cities, particularly in the apartment market, in most cases the opposite happened.
Instead of the predicted drop in prices, many suburbs saw property prices increase as much as 20-40 per cent instead, or even more.
So if the experts can get it so wrong, where does that leave the rest of us?
Lean in to risk
Many people hoard cash in their bank account because they’re too fearful to invest.
There is a lot of talk about fight or flight when it comes to fearful situations (and money can be fearful for many people) but what we don’t talk enough about is freezing.
Freezing because we’re afraid to invest due to uncertainty and instability about what the market is doing, exacerbated by conflicting opinions of experts and in the media.
Freezing might feel safe, but it can see you sliding backwards.
If you’re hoarding your savings in cash, you might believe your money is safe, but what you might not realise is the very real chance that your money is going backwards.
You probably equate falling prices with the share market, but if you’re only saving cash in the bank and treading water, that could be what is happening with your savings too.
Don’t bank on the bank
Why?
Because inflation may erode the purchasing power of your money (this means that a fixed amount of money will buy fewer things in the future).
So, if you’re investing all your money in cash in the bank, you may find that $1 today is only worth $0.80 in seven years’ time.
Now, 20 cents might not seem that much, but let’s look at what that might mean for larger sums.
Let’s say you had $20,000 in savings in a bank account today earning 1.5 per cent interest – in twenty years’ time that would amount to $26,992.
Not bad.
But the problem is when inflation is above that.
Historically, inflation sits at about 2.11 per cent which means in 20 years’ time, you would need $30,319 just to have the equivalent of $20,000. In other words, you’re behind almost $3,000.
Suddenly, simply saving cash in the bank because you’re scared to invest can start to seem unsafe. It highlights that there can be risks with being too risk averse and freezing during times of uncertainty.
It’s all in the timing
Of course, it’s important to understand the timeframe you’re looking at (you wouldn’t risk your house deposit in the share market) and your risk profile.
But if you’re not investing because you’re frozen, it’s time to figure out how to get you unstuck.
What’s important to understand is that no-one can accurately predict what will happen when it comes to investing and markets.
Yes, we can give educated guesses, we can look at all the variables we’re presented with and give opinions but unless someone has invented a time capsule, no-one knows for sure. That’s why, instead of trying to predict the market and highs and lows, it’s about time IN the market.
For most of us that will mean sometimes we buy when the market is at its peak, or at its lowest or somewhere in between. But if your aim is to hold for the long term (more than seven years), then ultimately, in 20 years’ time, those highs and lows won't matter.
Melissa Browne is an ex-financial advisor & now financial educator. Join her Financial Self Care Challenge which starts on September 5 at www.melissabrowne.com.au/challenge
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