How can holding money in cash be risky?

Let’s say you pack a locked, fireproof box full of $20 bills and slide it under your bed. That’s pretty safe, right? Now you don’t have to deal with the ups and downs of the investment market ever again.

In 20 years, you open the box. There are all your savings, the $20 bills just as crisp as the day you packed them away. You take them out, ready to go on a spending spree. But wait — everything’s more expensive now because of 20 years of inflation. Your money won’t go nearly as far as it did when you locked up that box.

Where did things go wrong? The fact is, holding money in cash means no market volatility, but it also means no potential for growth (or very little in the case of a savings account). Inflation has been in the news a lot lately, but it’s always a factor you need to consider when deciding where to keep your money.

So, what are your options when it comes to saving

In general, if you need to use your money in the near future, cash is the best option. You don’t have the time to ride out a volatile market. However, if you’re saving for a goal that’s 5 or more years out — say, your retirement, a down payment for a home or your young children’s post-secondary education — you need your investments to, at minimum, keep pace with inflation. In that case, it makes sense to get some exposure to the growth potential of mutual funds*, exchange-traded funds (ETFs)* or stocks*.

Here’s a simple example. You have $10,000 earmarked to put toward a new car in 10 years. If you tuck it under your mattress, you’ll have $10,000 at the end of that time — but assuming a modest average annual inflation rate of 2% (much lower than current inflation rates), the money’s purchasing power will be just $8,203.48 once you’re ready to buy that new car.

If you get an annual return of 2%, you can break even — but investing has the potential to help you do better than that. With an annual investment return of 5%, you’ll have $13,362.61 to buy your new car — even after inflation. You’ll have preserved the full value of your $10,000, and you’ll have some extra money there to spend on a nice speaker system or to keep investing for your next goal.

Staying ahead of inflation with a personalized financial plan

In the end, cash isn’t risk-free — it just comes with a different kind of risk than investments. If you’re wondering exactly how to invest to stay ahead of inflation and meet your investment goals, chat with a financial advisor at your local Prospera branch.

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Disclaimers

Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.