Cash Might Make You Happier, But Investments Will Make You Richer

By Annie Mueller on 18 July 2017 0 comments

Having a stash of cash feels great. Liquid wealth makes you feel more secure, because you can predict how you will handle whatever life throws your way. The feeling of satisfaction is real, but ultimately, the rewards of keeping your wealth in your checking or savings account are much less satisfying. If it's long-term wealth you're after, you need to start investing.

You're losing money

In the battle between interest and inflation, inflation wins when you keep your cash in a typical savings or checking account. You'll get very little in interest from a bank account intended for day-to-day use: typically, 0.01 percent to 0.03 percent for a checking account, and up to 1 percent for a savings account. Meanwhile, the average annual inflation rate is 3 percent. So your stash is losing value every year, as inflation climbs faster than interest grows your money.

The numbers work out pretty grimly in that scenario. Imagine you put $100,000 in a savings account with a 1 percent interest rate, and add $500 every month. Every year, you'll gain that 1 percent interest but lose 3 percent of the value, due to inflation — meaning you come out 2 percent behind annually. In 10 years, you'll have $173,522 but it will only be worth $129,117.17.

On the other hand, the return on stock and real estate investments is staying stable at 7 percent. That's the real rate of return, meaning it's adjusted for inflation. After 10 years, your $100,000 investment, with the monthly $500 addition, will have an actual value of $267,357.54.

Why wouldn't you immediately put your money into a higher-yield investment? For most people, the hesitation comes from fear of taking a big risk with money.

What's the big risk?

Humans tend to be risk averse. This risk aversion has done a lot for us, in an evolutionary sense.

Risk aversion is also helpful in finances in many instances. When it comes to getting high-interest return on your savings, however, risk aversion can hinder you. To maximize your savings, you need a high return that will outrun inflation and exponentially add financial value to your nest egg.

High-return investments, unfortunately, are also higher risk investments. If you're unfamiliar with the stock market, investment portfolios, and the like, these types of high-return investments can feel terrifying. But you can overcome that fear.

First, start a relationship with a financial investment professional. Ask for recommendations from people you know and trust, who are not struggling financially. Second, don't invest all your money in one high-yield investment. Diversify; if one investment doesn't grow as predicted, it won't topple your entire savings plan. Third, you don't have to invest all your money in what feels riskiest. You can set up a CD, invest in bonds, or invest in real estate. All require some investigation to understand the risk and potential return.

Get professional insight on the options that appeal to you and make a well-informed decision. It's never about eliminating risk; that's not quite possible. It is about minimizing risk and maximizing return. You do both by investigating, seeking expert insight, and diversifying the way you save your money.

Save yourself from hasty decisions

Keeping your wealth in a less-liquid state helps you financially by delaying your financial decisions. If your main funds are tied up, for example, you can't immediately invest in Cousin Jimmy's startup. Even if you really, really want to.

Maybe Cousin Jimmy is a genius, and you do want to invest; still, it's good to have to think and compare numbers. Can an investment in a family business give the same high-interest return on investment? What's the risk, compared with the risk you're already taking? How long before you'll see a return?

Having time to think will help you avoid hasty decisions you might regret. Whether it's investing in a family member's venture or purchasing that dilapidated house in an up-and-coming area, time is on your side.

But I still want to feel happy

A recent National Center for Biotechnology Information study shows that higher levels of happiness are linked to keeping cash on hand. Happiness is great! We all want more of it. But you can get the happiness that cash brings while also setting yourself up for long-term financial rewards.

Having money at the ready contributes to feeling secure. You can get that financial security by reducing high-interest debt and setting up automated savings so that you can keep a reasonable amount of cash at the ready. Experts recommend having three to six months' worth of living expenses; but you can be smart about how you save that cash reserve, as well, by keeping it in an interest-bearing savings account or a short-term CD. When your reserve grows over your emergency-fund amount, invest it rather than hoard it.

Remember, you'll want to feel financially secure later in life, too. Smart financial moves now contribute to your happiness in the present and the future.

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Cash Might Make You Happier, But Investments Will Make You Richer

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