Having too much cash could never be a bad thing, right? Well, unfortunately too much cash could really be holding you back from building wealth. When we hear about Jeff Bezos or Elon Musk and the billions of dollars they have, we need to realize they have next nothing in cash. Billions of their net worth are invested in stocks, fixed income, real estate, private equity, land, and their own businesses. Now I know what you’re thinking, “I’m not a billionaire, I don’t have the resources”, that is beside the point. You can take the principles of how the wealthy invest and apply it to your own life and I will help explain all of that today.
Inflation… a misunderstood variable when it comes to saving and investing but one that has a massive impact on your ability to build wealth. This is the reason having too much cash is actually a bad thing. Right now when you look at your savings account like I am, you are probably seeing an interest rate next to ZERO. That means all that cash sitting there is essentially not growing.
On the flip side, inflation in 2019 was about 2% meaning that the cost of living (aka groceries, fuel, living expenses, etc.) has increased by 2%. When you start to do the math, your money is growing at 0 while your everyday expenses have increased by 2%, which means you’re looking at negative returns overtime (0-2= -2%). Pretty hard to grow your wealth if your returns are negative.
As much as we like to think cash is safe, as shown above, cash has some pretty obvious risk. Over time if our savings accounts return 0 and the cost of living keeps rising we lose buying power. $1 today does not buy the same amount of goods as $1 next year if your money doesn’t grow.
Well then, the question becomes “How do we grow our money to beat inflation?” The answer to this is easy my friend, INVEST.
Investing your money gives you the opportunity to earn a higher rate of return. This allows you to stay ahead of inflation and gives you more buying power. Now there are a million ways to invest but remember, keep it simple. Invest in quality stocks, ETFs, and mutual funds and over time you can give your money the chance to grow.
The average annual return for the Dow Jones over the past 20 years has been about 7% and government bonds have returned between 5-6%. Let’s use stocks, for example, take the 7% return minus 2% inflation equals a 5% return. That 5% is well above inflation and will allow you to increase your purchasing power as opposed to losing it when your cash sits in a 0% savings account.
Remember do not invest every dollar you have because stocks and bonds do not guarantee a return each year. Always have 3-month emergency savings if your married and 6-month emergency savings, if you’re single. Once you have the savings locked down, learn to invest so you can start to build wealth and financial freedom!
Today we covered the little known but very powerful variable… inflation. Inflation is a key part of a healthy economy but we also need to understand how inflation impacts our ability to buy the everyday goods and services we enjoy.
The solution was to invest your money as opposed to keeping too much of your portfolio in cash. We went over the impact of inflation on a savings account returning 0% and investment returns on stocks averaging around 7% and how investing helps you outpace inflation.
I hope you found something valuable in the post today and feel free to comment with any questions. We would be happy to help you all out. Our mission at Strong Dollar is to make sure you have the tools to live a healthy lifestyle, build wealth, and become the best version of you!!
As always: FITNESS + FINANCE = FREEDOM
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