Since young, one of the first pieces of financial advice our parents likely imparted was to save money – and to save as much as possible for unforeseen circumstances.
As grown-ups, we go to work, try to climb the corporate ladder and each month, sock away a percentage of our salary in a savings account. This all sounds great, until you realise that while you’ve been hard at work, the money in your bank account has been collecting pixel dust.
As we grow up, we work hard, aim for job promotions, and save part of our salary each month. It all sounds good, but then you realise that the money in your bank account isn’t doing much, relative to other savings options.
The downside of sitting in idle cash
Idle cash as its name suggests, is cash that is not meaningfully earning you any interest or investment income.
To put things in context, consider this. According to an analysis by Goldman Sachs, the S&P 500 has returned 13.6% annually over the past 10 years. If you invested $10,000 in 2010 – and added nothing else, you would have had close to $36,000 in 2020. However, had you chosen to retain that money in a standard savings account with just 0.05% annual interest rate, your additional earnings after a decade would have amounted to a mere $50.
Assuming an average yearly inflation of 2%, that would have meant you lost purchasing power. The value of your original $10,000 savings would have been eroded by inflation, meaning that it would eventually only buy $9,800 worth of things, then $9,600, and so on.
If you think that’s bad, think about the potential missed opportunities when you could have invested that money to generate higher returns. If you had remained invested from 2010 to 2020, your capital could have more than tripled.
Managing cash in a low-interest environment
Although investing your cash presents the opportunity for higher returns, it’s crucial not to allocate all your funds into investments. Conversely, it remains essential for most individuals to uphold a readily accessible cash buffer, commonly known as your emergency fund.
Should you be laid off, or run into a medical emergency, the cash in your emergency fund can be quickly tapped into to cover any unexpected costs without you having to incur extra debt. This helps you keep your finances in good shape even as you search for a new job or spend time recuperating.
Putting your surplus cash to work
Normally, experts suggest putting away enough money to cover 3 to 6 months’ worth of living expenses as your emergency cash reserve. To make the most of this money, you can park them in a high yielding savings account.
Once you’ve settled your emergency fund, you can then determine how much of your surplus savings can be invested over a longer duration. Remember, the sooner you start investing, the more time your money has to grow due to the magic of compounding returns.
Not sure where to start? Explore Syfe’s range of investment portfolios here. If your aim is to build a passive income stream, you can consider Syfe’s Smart Baskets, which automatically invests your money based on your needs and goals. If you desire flexibility and want the potential for higher returns, Syfe also enables you to invest in ASX and US stocks at low costs.
In the end, leaving all your money in the bank means missing out on potential gains. Your emergency fund and extra cash should find smarter places to be – your emergency fund for better growth, and your surplus cash invested to hedge against inflation and continue amplifying your wealth.