You’ll often hear that your first financial priority should be to build yourself an emergency fund. And to that end, a good goal is to sock away enough cash in your savings account to cover three to six months of essential expenses. (Some experts, in fact, say that having up to a year’s worth of expenses in cash is a good bet.)
But what if you have savings beyond what you need for emergencies? Should you keep that extra cash in the bank, too?
According to Shark Tank’s Kevin O’Leary, that’s actually not a wise move at all. In fact, given the way inflation is soaring, keeping too much cash in savings is a giant mistake.
The downside of savings accounts
A savings account is a nice, safe place to keep your money. But you won’t see a lot of growth on your cash if you keep it in savings for years on end. That’s because even during periods of higher interest rates, savings accounts just don’t pay all that much. On the other hand, if you invest your money in a brokerage account, you’ll have an opportunity to grow it into a much larger sum — and you might generate five to 10 times the returns you’ll get in a savings account.
O’Leary especially thinks that now’s not the time to keep too much cash in the bank, given how inflation is soaring. In fact, if you put too much money into savings, O’Leary says, you’ll effectively be losing money because the growth you see in that account won’t be enough to keep pace with rising living costs.
Plus, keeping too much money in a savings account over time could make it so you’re unable to comfortably manage your expenses in retirement. That’s because a dollar today will have less buying power in the future, so you need to invest for your senior years in a manner that keeps up with inflation.
How to invest for the first time
If you’ve never invested money before, the idea can be daunting. To that end, O’Leary says it’s a good idea to take advice from investing giant Warren Buffett and put money into broad market index funds.
Index funds are passively managed funds, and their goal is to match the performance of different indexes, like the S&P 500. They’re an easy way to snag instant diversification in your portfolio without having to research dozens of different companies (and diversification can help you enjoy growth and minimize losses).
In fact, O’Leary says you may want to focus on S&P 500 index funds. That’s because historically, the S&P 500 index has done a good job of outpacing inflation.
Of course, if you’re up to the challenge of hand-picking stocks, you can build yourself a nice portfolio that way as well. But if not, there’s absolutely nothing wrong with taking the easier way out and buying index funds.
Either way, don’t make the mistake of leaving too much money in a savings account. You might think you’re minimizing your risks in doing so, but in reality, you’ll be taking on another risk — that your money won’t grow at a rapid enough pace to buy you a comfortable lifestyle down the road.
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