Your savings account is slowly losing money
Many families keep large amounts in cash to stay safe. Here is what that safety costs.
3 min read
Cash feels safe. For your emergency fund, cash is the right choice. But cash beyond that loses value every year, because prices go up. This is called inflation.
What $100,000 in a checking account can buy, with prices rising 3% a year:
Today$100,000
After 10 yearsAbout $74,000
After 20 yearsAbout $55,000
Why families keep cash
Many immigrant families lived through bank failures or money crises. Being careful makes sense. But the US has protections:
- Bank deposits are insured by the FDIC, up to $250,000 per person, per bank.
- Brokerage accounts are protected by SIPC, up to $500,000, if the brokerage company fails. SIPC does not protect you from prices going down.
- A broad index fund owns thousands of companies. It is not the same as betting on one stock.
A middle path
- 1Keep 3 to 6 months of needs in high-yield savingsThis is your emergency fund.
- 2Choose an amount to invest each monthFor example, divide your extra cash by 12.
- 3Invest that amount every month for a yearBuying slowly means you don't put it all in on a bad day.