While there is little or no risk attached to having some money at home. However, keeping large amounts of money is not advisable in investment.
Risks of keeping cash at home
Susceptibility to theft and loss
Keeping a large amount of cash at home puts it at risk of theft, misplacement, or destruction. Unlike bank funds, which are usually insured, cash kept at home is not protected. In the case of burglary, fire, or natural calamity, the loss of cash is irretrievable. According to financial expert Bill Waggoner, “Keeping some spending money at home is handy, but keeping large sums at home leaves your fortune open to loss.”
Lack of interest accumulation
Cash at home doesn’t accrue interest, so over time, that means lost income. Money placed in financial institutions grows via interest and therefore increases wealth. According to MyBankTracker, “If you make a practice of keeping several thousand dollars in cash at home, it’s effectively dead money. Not only does it not earn interest, but it actually declines in value.”
Impact of inflation
Inflation tends to reduce the real value of money over time. Cash kept at home doesn’t grow; it becomes worthless as the price of goods and services goes up. Investing in interest-bearing accounts or assets is a way to somewhat avoid this effect, as it returns more than the rate of inflation. According to Quorum Federal Credit Union, “When cash doesn’t grow, it loses some of its value. This is especially true during times of rapid inflation.”
Alternative strategies for cash management
For the protection and increase of your money, the following alternatives are available:
High-yield savings accounts
These accounts pay higher interest rates than a traditional savings account and allow your money to grow while still being highly liquid. Money placed in these accounts is usually insured up to $250,000 by either the FDIC or the NCUA and is protected from bank failures.
Certificates of deposit (CDs)
CDs are time deposits carrying fixed interest rates for a certain term. Many times, they offer higher returns than a regular savings account and are meant for funds that one can set aside for a longer period. However, accessing the money before the term is up may incur penalties.
Money market accounts
Money market accounts incorporate characteristics of both savings and checking accounts, providing higher rates of interest with some checking privileges. They are appropriate for people who want a high return with some liquidity.
Treasury securities
Invest in the security of US Treasury securities such as Treasury bills or Series I Savings Bonds. You will realize returns from these government instruments that may be at pace or above inflation, ensuring your money maintains its buying power over time.
Real estate investments
Real estate may be used as an inflation hedge, as the value of property and the income derived from it usually increase with increased inflation. REITs give investors a chance to invest in real estate without assuming the responsibilities that come with managing property.
Precious metals
Historically, gold and silver have been considered a hedge against economic downturns and inflation. A small allocation to precious metals can add diversification to your portfolio and protect against currency devaluation.
