During the Great Depression, many banks failed, and millions of families lost the savings that they had deposited in them. As a result, even today, many older people warn younger generations against keeping money in the banks. Instead, they advise, hide your savings in a safe place in your house.
In this clip, Motley Fool analyst Gaby Lapera and senior banking specialist John Maxfield discuss why this is not a good idea, and what you should do instead.
A full transcript follows the video.
This podcast was recorded on Dec. 21, 2015.
Gaby Lapera: So, point No. 3, which is kind of related to point No. 2. This was really common: "Keep cash." Now, I'm not saying this is terrible advice in and of itself. I keep cash. I used to be a bartender, and used to keep quite a bit of cash on me at all times. You never know when a business only takes cash. I guess, now you do, because you can check online.
But some people try to do all their purchases with cash, because it acts as a psychological curb that says, "OK, I'm physically handing over something for this, and I'm getting something back," and it makes it harder for them to impulse buy, as opposed to with a credit card, there's not that feeling that you're really spending anything, you know what I mean?
John Maxfield: The thing about cash is that cash has a time and a place. It gives you what our colleague Morgan Housel calls "optionality." If you have a ton of cash and the market tanks, you have the dry powder, if you will, to go out and buy cheap stocks. If you don't have cash, you don't have that.
But everything in moderation. As a general rule -- I'm a lawyer, so I think in general rules and exceptions -- you're going to want to keep cash. But if you're keeping more than whatever you perceive to be necessary to give you peace of mind in terms of a safety fund, [enough for] six months or a year -- if you're keeping anything more than that, you're losing value. Even though inflation isn't an issue, it is still increasing at 0.5% or 1% per year, so you're losing value simply by keeping it in cash.
Lapera: I just want to interject here, and I think you're correct 100% in what you just said, but I'm talking about physical stockpiles of cash that you stash underneath your mattress.
Maxfield: Oh. Like Floyd Mayweather.
Lapera: Yes. Like, this is very common with, like, grandmas especially -- to take your cash and just stash it somewhere in your house. So, instead of having a savings account, you just have all of that in cash somewhere. So, there's a few problems with this.
One, if you have a lot of money, where are you going to put it all? Two, even if it's in a money market account, even though money market accounts aren't making a ton of money, that money could be making some interest in the bank, even if it's not a lot. Three, this is the same issue that you have with gold bullion, which is, what if someone breaks into your house and steals all your cash? What if your house burns down? Your cash is just gone, all your savings.
Maxfield: Can you imagine? That would be horrible.
Lapera: It's awful. I'm laughing, but it's so bad.
Maxfield: Yeah, it would be so horrible. Yeah, I would say there's definitely an added element of actually keeping it in paper.
Lapera: This tends to be one you hear from older relatives who maybe lived through the Depression and the bank runs and things like that. But it's not an uncommon sentiment, is what I gathered from asking people in the office.