Why Your Savings Account May Not Be as "Safe" as You Think
Executive Summary
Cash and Inflation: Holding too much cash may reduce your purchasing power over time.
Growth Potential in Investments: Diversified portfolios have historically provided stronger long-term growth compared to cash, though they involve risk.
Personalized Planning Matters: The right balance between cash and investment depends on your individual circumstances and tolerance for risk.
In recent conversations with clients, friends, and community members, one concern keeps surfacing: uncertainty about the economy. From tariffs to cuts in education funding, many individuals have turned to cash as a “safe” option. But is holding large amounts of cash truly the safest long-term strategy?
I remember the challenges my family faced during the 2008 financial downturn. Like many households, we made sacrifices—no new cars, fewer vacations—and for others, the consequences were more severe. Having an emergency fund during uncertain times can provide important flexibility. For most people, six months of living expenses in a separate, liquid account is a common starting point. Depending on your situation, such as variable income or a single-income household—holding more may make sense.
That said, holding too much wealth in cash carries its own risks. Inflation, for example, steadily erodes purchasing power. In 2020, $100 worth of groceries would cost about $122 today. Even with a modest 2% interest rate over five years, $100 in savings would have grown to about $110, leaving you behind after inflation. ¹
Investing provides the potential to outpace inflation, though it involves risk and the possibility of loss. For instance, if that same $100 had been invested in a diversified portfolio of stocks and bonds, historical averages suggest it could have grown to approximately $140 over five years, assuming a 7% annualized return. However, markets fluctuate, and returns are not guaranteed. A 60/40 stock-and-bond portfolio, while historically resilient, has experienced negative years. ¹ ²
The key question becomes: which is riskier holding too much cash or taking a measured approach to investing?
Cash will always play an important role in financial planning, but it’s important to determine how much makes sense for you. The appropriate balance depends on factors such as income stability, goals, and overall financial situation. A financial professional can help you assess your unique needs and design a strategy aligned with both your comfort level and long-term objectives.
¹ Current US Inflation Rates: 2000-2025
² 60/40 Portfolio Returns | Advisorpedia
Disclaimer: This material is provided for informational purposes only and is not intended as investment advice. Past performance is not indicative of future results. All investing involves risk, including the potential loss of principal. Please consult a qualified financial professional before making decisions about your specific situation.
