1 in 5 Hardworking Americans Thinks Most of Their Savings Should Be in Cash. Here’s Why They’re Wrong

When you work hard for your money, which most of us do, the idea of potentially losing some to a bum investment can seem downright terrible. As such, you may be leery of putting your money into the stock market.

Data from Stash reveals that 20% of hardworking Americans think the bulk of their savings should be all cash. But if you adopt a similar approach, you might lose out on tremendous gains through the years.

The problem with sticking to cash

If you make a point to bank at an FDIC-insured institution, then your principal cash deposits are protected in the event of a bank failure provided they don’t exceed $250,000 (or $500,000 in the case of a joint account). On the other hand, when you buy stocks, there’s a chance their value will decline from one week or month to the next.

As such, you may be inclined to stick to cash for your long-term savings. But if you do, you might end up regretting that decision big time.

While stocks carry a degree of risk, they tend to offer much stronger returns than cash. And you may need those higher returns to meet your long-term savings goals.

Right now, you can generally snag a 4% return or more in a high-yield savings account. But today’s rates aren’t the norm.

So let’s say you save $200 a month over a 30-year period, all the while earning 3% on your cash in the bank. After three decades, you’ll have around $114,000. But if you’re saving for a milestone like retirement, that’s not a lot of money to work with.

On the other hand, let’s say you invest your $200 a month in stocks and score a 10% annual return, which is consistent with the market’s average over the past 50 years. In that case, you’ll grow your savings to about $395,000, which is a far cry from $114,000.

How to minimize risk as a stock investor

You can’t remove the risk that comes with putting your money into stocks. It’s just not possible. But one thing you can do is pledge to invest over a longer period. That gives you an opportunity to ride out market downturns and recover from temporary losses.

Remember, the 10% annual return referenced above wasn’t the return the stock market recorded every year over the past 50. That’s just an average based on strong years and plenty of years of market declines.

Another way to minimize your risk of losses as a stock market investor is to diversify your holdings. Buy different stocks from companies across a range of market sectors. Or, load up on broad market ETFs (exchange-traded funds), which allow you to own a bucket of stocks with a single investment.

You might think that keeping most of your savings in cash is the safest bet. But while that might help you avoid losing money, it could also be a big impediment to gaining money through the years. And ultimately, it’s a financial decision that may not serve you well at all.

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