Just about all of us need to save money -- for a rainy day, for retirement, for a new car, for Junior's college tuition, for a down payment on a home, or for any number of other needs. Unfortunately, many people who need to save are not doing so. Nearly as troubling, many who are saving are doing it wrong.
Here's some shocking data on the state of retirement savings in the United States: According to the 2014 Retirement Confidence Survey from the Employee Benefits Research Institute, 60% of American workers had less than $25,000 saved for retirement (excluding the value of their home) and 36% of American workers had less than $1,000 saved. Another recent survey, from American Express, offered more cause for concern: While most Americans are saving their money at a bank, fully 29% said they're keeping some of their savings at home, in cash, in hidden places. Among millennials, those aged 18 to 34, a whopping 67% of those saving money in the form of cash are hiding it.
For a variety of reasons, that's just not smart.
Say no to mattresses
For starters, money left under a mattress, in a sock drawer, in an old coffee can in the back of the pantry, or in the freezer, can be stolen. These are among the many places someone breaking into your home might look for a cache of cash. And if you live with others, even if they're family members, someone might find and take some or all of your money.
Even if the money is not stolen, there's a reasonable chance you might just forget it's there, or where you put it. Hasn't that happened with other important items you put away in "a safe place"? Oh, and what if a fire ignites in your house and your money literally goes up in smoke?
Another downside is that money hidden in your home will lose its purchasing power over time, due to inflation. Inflation has averaged about 3% per year over long periods, so $1,000 socked away in your home might have the purchasing power of just $500 or so two decades down the line.
There's your opportunity cost to consider, too. If you stuff $3,000 in a mattress, you're opting not to find other uses for that cash. For example, you're not depositing it in a savings account where it will at least keep closer to inflation (although the days of 3% interest-per-year savings accounts seem to be behind us). If it's long-term retirement savings money, and not an emergency fund, then it will likely grow most briskly in the stock market, which has averaged 10% growth annually over many decades. So: $3,000 growing at 10% for 20 years will amount to more than $20,000. In a coffee pot for 20 years, it will be just $3,000. Stolen or forgotten, it will be less than that.
What to do
What should a sensible saver do? Well, think about what you're saving for. Retirement savings you want to grow for a decade or more will probably grow most briskly in the stock market. Savings you plan to tap within a few years for college or a home down payment shouldn't be in stocks, lest the market tank at an inconvenient time. Savings accounts, money market accounts, short-term bonds, or CDs are better options for those kinds of savings. (Weigh their risks, though, as even short-term bonds can lose value.)
Finally, you'll want emergency-fund money to be accessible on relatively short notice, so even a three-year CD might pose a problem, as you don't want to be penalized for accessing the funds early. Thus, consider ultra-safe options such as a savings account. Some might also consider relying on a line of credit, but that's risky, especially if it's secured by your home. It's best to keep three to nine months' worth of living expenses available, or to at least have a plan for how you'll stay afloat for an extended time without losing your home or going deep into debt.
Most of us need to save, and most of us should keep most or all of our savings out of hidden nooks and crannies at home. It's fine to keep some spending cash, but for longer-term savings, don't take unnecessary chances.