You're not alone in thinking investing seems a little iffy right now. You work hard for your cash, and inflation's sky-high. Why take the risk of losing it, right? But the thing is, you have to do something with your money, and many supposedly safe options carry risks as well.
Don't believe me? Let's put these three "safe" money homes under the microscope and find out.
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1. Safe deposit boxes
This one may not be all that common, but I know someone who kept a big wad of cash in a safe deposit box for years. If you do this, you don't have to worry about anyone stealing it or your savings unexpectedly dropping in value like you would if you invested it. But you're also not making any money off of it. The $5,000 you put into a safe deposit box will stay $5,000 forever.
You know what's not going to stay the same? How much that $5,000 will buy. Over time, inflation will continue driving up living costs, meaning you'll have to spend more dollars later to buy the same things you're buying right now. By leaving your money in a safe deposit box, it's losing value slowly but steadily.
2. Savings accounts
Savings accounts have a few things going for them that safe deposit boxes don't. For one, your money is insured up to $250,000 per depositor per bank account type against bank failure. Another benefit is that you get a modest amount of interest on your savings, which is reflected in the account's annual percentage yield (APY). A higher APY translates to more money for you.
Banks can change their APYs at any time, and how much you earn depends, in part, on the bank you choose. You might only earn 0.01% with a brick-and-mortar bank account, about $0.10 on a $1,000 balance in a year. On the other hand, an online savings account might offer you 1.50% or more right now. That'd earn you $15 in a year on a $1,000 initial deposit.
But even the best high-yield savings account APYs still can't keep up with inflation. This is true even when inflation isn't at its highest rate in decades. So, you're still going to lose buying power over time with a savings account, though it'll happen more slowly than if you kept your money in a safe deposit box.
That doesn't mean savings accounts are useless, though. They're great choices for your emergency fund and the money you plan to spend within the next five years. You want this money somewhere accessible, where you can withdraw it at any time without fear of loss. But you shouldn't keep long-term savings in a savings account.
3. Long-term CDs
Certificates of deposit (CDs) are similar to savings accounts in that they're insured against bank failure and offer an APY. Some CDs offer slightly higher APYs than savings accounts, but in exchange, you must promise not to touch your money for a certain amount of time. This might be a few months for a short-term CD or several years for a long-term CD.
But there we run into the same problem we had with savings accounts. You might make money, but you'll still lose buying power over time.
So, where should you keep your money?
Investing is usually the best home for your long-term savings because it enables you to grow your wealth at a pace that often beats inflation. Yes, there's a chance you could lose money in the short term, but over the long term, the stock market does pretty well.
If you're worried, take steps to reduce your risk of investing loss. Make sure you diversify your money among at least 25 stocks in several market sectors. An index fund is a great way to do this with a single purchase. An index fund is a bundle of stocks you purchase together, and it mimics the performance of a market index like the S&P 500. Many have historically strong returns, and they're among the most affordable investments out there.
You should also think about your risk tolerance when you're investing. Keeping a lot of your money in stocks is smart when you're young, but when you're on the verge of retirement, too much exposure to stocks could put you at risk of huge losses. As a general rule, try to limit your percentage of stocks to 110 minus your age. That means you'd keep 80% of your money in stocks if you're 30 but only 70% if you were 40. Consider putting the remainder in bonds or something less volatile.
Investing will always carry risk, but so does every decision you make with your money. Before deciding what to do, it's important to weigh the pros and cons of all your options objectively.
