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Cash is an investment (with a negative return)

Iftikhar Ahmed, CFP®

2 min read

Mar 1

Most of us have a unique relationship with our money. Some of us splurge, while others stash away every penny. Some invest for long-term gains, some for income, and others to preserve their wealth. However, we often encounter people who are uneasy about investing due to the fear of losing their money. This leads them to keep substantial amounts in bank accounts—or metaphorically, "under the pillow."


The crucial concept I want to emphasize is this: Choosing to keep your money in cash is, in itself, an investment decision. This decision has a return, just like any other investment, but here’s the catch—it’s typically a negative return due to inflation.


Let's break it down: inflation erodes the value of cash over time. For instance, at a 5% annual inflation rate, the purchasing power of $100 diminishes to about $29.53 over 25 years. That's like watching more than 70% of your money vanish into thin air without spending a dime!


So, what’s the takeaway? It’s time to reconsider the role of investing rather than just holding cash. While it might seem safer to hold onto cash, the reality is that inflation can silently deplete your savings. Investing your money, on the other hand, not only combats inflation but also has the potential to grow your funds despite the inevitable ups and downs of the market.


Investing isn't just about seeking profits; it's about protecting the value of what you've already earned. By exploring investment options that align with your risk tolerance and financial goals, you can ensure that your money works for you, keeping pace with or outstripping inflation.


Ultimately, it’s crucial to understand that the risk of losing money isn’t confined to stocks or bonds—it also lurks in overly cautious strategies like hoarding cash. A thoughtful approach to investing can shield your savings from inflation and help secure your financial future.


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