Why You Shouldn’t Keep Your Savings in Cash
In this article I’m going to describe why you shouldn’t save cash, either in the form of $100 bills under your mattress or keeping it in your typical bank savings account. I will also discuss alternative places to save your cash, and the benefits of each.
Inflation – this is the one word reason why you should never keep any of your money in cash. Inflation is a slow rise in the overall price of goods and services over time. This means that every year, the purchasing power of a fixed amount of money will drop; in other words, as time goes on things become more and more expensive at a very slow rate. This is why a dozen eggs no longer costs 10 cents, like it did back in the 1930s’
It’s hard to notice this effect year to year, however, over many years, the power of inflation will erode our savings like a stream can slowly erode the rock to eventually form a canyon. If you had a $100 today, then next year you will be able to buy less for the $100 than you would have been able to today. Then the year after that, even less.
How fast does inflation occur?
The average U.S inflation rate is averaged between 2.4% and 2.7%; some years it has been higher, for example the rate in 1990 was around 6%, and some years it’s been lower, for example in 2016 it was 1.0%.
2.4% every year doesn’t sound like much, but if you look at a 30 year period from 1990 to today, if you had held onto physical cash, it would be worth about 50% less today than it was in 1990. If you had $5000 in cash in 1990, it would have the purchasing power of about $2500 today in 2020.
Even though the average US inflation rate has been about 2.4%/year on average for the last 30 years, that doesn’t mean everything has the same rate of inflation. The table below is an estimate of the inflation rate from 1990 to 2020 for homes, cars, 4 year college education, eggs, and milk. I’ve also thrown in the rate of growth of the median family income (note that this median family income is derived mostly from White Americans – the medians from Hispanic and African Americans are lower and have grown at a slower rate).
| Avg Yearly Price Increase | |
| Average US Home Cost | 3.15% |
| Average New Car | 2.95% |
| Average Tuition Cost at 4 year Institutions | 4.39% |
| Average Cost of a Gallon of Milk | 0.72% |
| Average Cost of A Dozen Eggs | 0.67% |
| Median U.S Household Income | 1.25% |
The inflation rate for homes, cars, and college tuition is higher than the average. The table below shows us how prices and costs have increased from 1990 to today, and it projects the prices for certain items in 2050 if we assume the same rate of inflation.
| 1990 | 2020 | % Increase | Projected 2050 | |
| Average US Home Cost | $151,000 | $383,000 | 153.64% | $971,450 |
| Average New Car | $15,472 | $37,000 | 139.14% | $88,482 |
| Average Total Tuition + Board Cost at 4 Year Universities | $30,836 | $112,000.00 | 263.21% | $406,797.25 |
| Average Cost of a Gallon of Milk | $2.78 | $3.45 | 24.10% | $4.28 |
| Average Cost of A Dozen Eggs | $1.00 | $1.22 | 22.00% | $1.49 |
| Median U.S Household Income | $54,000.00 | $78,500.00 | 45.37% | $114,115.74 |
This is kind of scary. If you’re 20 years old now and planning on having kids when you’re 30 years old, your child will be 18 in 2048 and you may have to end up paying a total of $406K for your kids college education (unless the government steps in and does something, but that’s a discussion for a later day).
Where to keep your money instead?
Leaving money in physical cash, or in your bank’s savings account, in effect means that you’re losing money every year even if the number in your account doesn’t change. To avoid this, there are much better places to keep your money.
Where you keep it depends on what you are saving for and what your goals are. If you want to save for a new home, your money needs to grow at the same yearly rate or higher than the price of homes in your area. If your plan is to save for your future child’s education, you would need your money to grow in value at at least 4.39% a year.
Low Risk Similar to Cash Savings
If you want to keep money as liquid as possible (easily convertible to cash with lowest risk), I suggest a CD, or a “Certificate of Deposit.” These are just high yield savings accounts that offer interest rates that will almost match the current inflation rate; your money will work and grow with inflation rather than stagnating and losing value.
Saving for College Tuition
If you want to save for college tuition there are 529 Plans and Education Savings Accounts where your money can grow tax free. You can choose the types of investments so your money grows at an average rate equal to, or grater than the inflation rate of education.
Retirements Savings
If you’re saving for the long term for retirement, I highly recommend a 401k if your employer provides one, and a Roth IRA if you’re able to contribute to one. These accounts can offer tax deferred contributions or tax deferred growth depending on the type of account you open.
General Savings
I recommend opening up a brokerage account and just investing monthly into a fund that tracks the S&P 500, which has grown about 7.81% averaged over the last 30 years. This is a good place to put money that won’t be needed for several years.
Conclusion
Inflation may not seem like a lot in the moment, but if we don’t act now it will drastically reduce our savings in the future. This is why it’s important not to keep money in cash, but rather have it invested in a index fund or in a high yield savings account. Not all prices inflate at the same rate; homes for example have prices that increase faster than those of groceries, so it’s important to figure out what growth rate your money needs to have in order to afford something in the future.