This post is a follow-up to a previous post on how to give yourself a raise by increasing your buying power. The problem is… the concept also works in the reverse.
You could be holding excessive cash, and costing yourself thousands of dollars without even knowing it.
How does that work? By keeping excess cash in your bank account, you lose money to inflation, opportunity cost, and potentially fees. And it all adds up over time.
For example: Regular Joe and Mr. CentsAndSense.com both start out with $20,000 in cash at age 28. Regular Joe keeps his money in a bank account, while Mr. CentsAndSense.com puts $15,000 in a ROTH retirement account (both already paid taxes on their $20k).
Here’s what their cash balance looks like over time (assuming the same 0% return in both bank accounts):
By age 65, Regular Joe’s $20,000 has decreased to only $8,600 in buying power due to inflation and lost opportunity from investments, while Mr. CentsAndSense.com’s $20,000 has increased to $156,795! One simple decision cost Regular Joe $148,195 even though they started out with the same $20k!
As another example, let’s pretend that both start out with only $500 to see what holding $500 in extra cash in a bank account does over time.
In this case, an extra $500 has cost Regular Joe $4,940 in buying power over 38 years!
That’s crazy! You can basically add $5,000 to your retirement savings right now just by moving $500 from a bank account to an investment account (assuming 7% annual returns)!
How many months worth of expenses do you carry in cash and are you carrying excess cash?
For more information on why you should be saving for retirement today, please visit this post. Once you’ve decided to open a retirement account, visit this page to learn more about your options (ROTH vs. Traditional). When you’ve started saving for retirement, visit this page for some quick hacks on how to save more money.