November 16, 2014 Admin | November 16, 2014 Cash in the bank is not risk free, nor is it as “safe” as you may think. Why? Alternatives?
4 thoughts on “November 16, 2014”
You still have inflation risk to deal with that can run about 3% a year. You should have your money some place that it can beat inflation, if you want safer returns that can normally beat inflation a no load bond index fun is the way to go, if you want better returns will more short term risk stock index funds are the road for you. You want to be making a real return on your money which is the return after costs and inflation.
Well said, Garrett. There is no risk free investment and that includes cash in the bank. Focus on understanding all types of risk and you will be empowered to make better decisions with your investment accounts. Believe in that and believe in YOU.
An FDIC insured depository institution (bank) eliminates the risk of losing your deposits (up to $250,000) in case a bank becomes insolvent or has liquidity problems. But the cash in your savings/checking account is not protected against inflation risk. With inflation increasing 2-3% every year, the bank’s interest paid on a savings/checking account is not even close to matching the inflation rate. Inflation causes a dollar to be worth less, so technically, money in a savings/checking account is becoming worth less with inflation. To dodge this inflation risk, one should deposit his/her money in account that will match/beat inflation, such as no-load bond index fund through Vanguard. This will provide an investor with much better returns than the bank, along with low risk. OF course, the no-load bond index fund is not FDIC insured, but there is little risk with higher returns than the depository institution.
Great answer, Jenna. Keep them coming!