Playing It Safe Is Not So Safe After All
by Stacy Francis, CFP®, CDFA
A recent study found that Americans put a smaller portion of their savings in stock market investments than people from some other countries.
We think we’re playing it safe by keeping the bulk of our money in cash instruments like low-interest earning CDs, Treasury bills and money market funds. But with interests rates ranging from 0.5% percent- 2.5 percent you can end up losing money. Inflation can eat away at those precious dollars and leave you living on less money than you started with.
Inflation can be a confusing concept but it doesn’t have to be. Inflation is the overall general upward price movement of goods and services in an economy. As the cost of goods and services increase, the value of a dollar is going to fall because you won’t be able to purchase as much with that dollar as you previously could.
The annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23 percent inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3 percent but can vary depending on circumstances.
The lesson here is that you will earn more with a little more adventure in your soul. Sock away 3-6 months of living expenses in CDs, Treasury bills and money market funds. Invest the rest in the stock market. Too much cash in reserve can represent wasted opportunity for you and your family
Stacy Francis is president and CEO of Francis Financial, Inc., a fee-only wealth management practice dedicated to investment advisory services for women, couples and those experiencing divorce. She is also the founder of Savvy Ladies®, a nonprofit organization that educates and empowers women to take control of their finances.