For those in your fifties or sixties, think back to your first job when you entered the work force. I still remember how ecstatic I was when I landed that summer job at an amusement park that paid me $1.50 per hour. Back in 1980, the minimum wage was pegged at $3.10 per hour. So, if you were earning $20,000 per year, chances are you were really living quite well.
Can you live on that kind of income now? I would venture a guess that your income, from all sources, is now a lot higher than that. So why can’t you live on an annual income stream of $20,000 today? The answer is quite simple. It is the ravishing effect of inflation. Inflation means loss of purchasing power. It creeps up on you year after year after year. How about those of you who are now in your twenties or thirties? Perhaps you think you are earning a good income. The same thing will happen to you. Just a little bit of annual inflation can erode the purchasing power of that salary, just as it did to your parents and grandparents. Just wait and see!
A survey commissioned recently by Bankrate.com, asked, “For money that you wouldn’t need for at least 10 years, what do you think is the best way to invest it?” The 5 most preferred long term investments, according to the survey were:
Cash:
Real Estate: 23%
Metals: 16%
Stocks: 14%
Bonds: 8%
I find it disturbing that the top answer, given by more than 1 in 4 Americans, was CASH. Cash is defined as money markets, savings accounts, and CDs. With the average money market mutual fund, according to Bankrate, now yielding .01% and the average 5 year Bank CD at just .78%, investing into cash devastates purchasing power, as today’s inflation rates hover between 2% and 3% annually, and historically inflation is higher, hovering closer to 4% plus.
Greg McBride, of Bankrate.com, notes that “A loss of buying power is just as damaging as a loss of principal.” Is there a time when you should hold money in cash?
Yes there is. How much should be in cash depends on your personal circumstances. Factors to consider include your age, short term goals, your employment status, years until your planned retirement, your current income from all sources, your present and planned asset allocation, emergency fund requirements, and so forth.
Unlike what you may hear from radio and television pundits, there is no one size fits all. Often I hear that six months of income is the right amount. In reality, that is not necessarily the case.
Everyone has a different set of personal circumstances to consider. A properly trained Financial Coach/Advisor can help you ascertain what is right for you. One thing is for sure, according to Bankrate.com, “If you combine the anemic rate at which people save and the low returns from cash investments, it threatens to leave millions well short of where they need to be for long-term goals, such as retirement and college education.”
Here’s a link to a 3 minute Fox Business video about the Bankrate survey. It is a real eye-opener for those clinging to cash for their long term and retirement goals.
http://video.foxbusiness.com/