Magazine

The Cost of Cash

The Cost of Cash

Keeping your savings in the bank can cost you, big-time. Here's why.

Saving money in the bank feels like a safe bet. That’s because you don’t ever see your account balance go down (unless you withdraw it yourself).

But there is a risk: If you’re only saving, you may be unable to reach your financial goals. Many of us need to grow the money we save in order to reach our goals—which is what investing is all about.

Think about this: If you put $25,000 in a savings account, after 35 years of earning interest, you’ll end up with $35,391 or more, assuming a range of many different economic scenarios.* And you’re guaranteed not to lose that money.

However, if you invest that $25,000 in a well-diversified portfolio consisting of 60% stocks and 40% bonds, your account will grow to $54,348 or more in 35 years, under the same economic scenarios.*

Of course, in the latter example, you risk losing money. There may be times, especially in the early years of investing, when you see your account balance dip down significantly.

In those times, just remember that, while such losses may be painful in the short term, you should be investing with the long term in mind. In the long term, historically the reward has been well worth the risk. This is especially important for your retirement savings. Taking a chance on investing, rather than settling for saving, can mean the difference between retiring on your own terms and being forced to work longer.

It's important to save and invest your money in order to achieve your financial goals. Especially as a woman, with a longer life expectancy than a man, building a large nest egg for retirement is critical. Just saving simply won’t get so many of us there.

We assume your savings are held in a cash investment such as a money market fund, with fluctuating interest rates over time. To project the performance of the cash investment, we used Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios through hundreds of different economic scenarios to determine a range of possible outcomes. The results shown reflect an 85% likelihood of achieving $35,391 or better, and include the impact of taxes and inflation, but not additional contributions or fees.

The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons. The results presented are not for any specific product and do not take into account specific product fees. Financial forecasts, rates of return, risk, inflation, and other assumptions have been used as the basis for the results presented.

We assume your savings are invested in a portfolio comprised of 60% Large Cap US stocks and 40% US bonds, which is rebalanced to this allocation each year. This commonly used allocation is for illustration only and does not necessarily reflect Ellevest recommendations. To project the performance of this portfolio, we used a Monte Carlo simu—lation—a forward looking, computer-based calculation in which we run portfolios through hundreds of different economic scenarios to determine a range of possible outcomes. The results shown reflect an 85% likelihood of achieving $54,348 or better, and include the impact of taxes and inflation, but not additional contributions or fees.

The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons. The results presented are not for any specific product and do not take into account specific product fees. Financial forecasts, rates of return, risk, inflation, and other assumptions have been used as the basis for the results presented.

Disclosures

© 2018 Ellevest, Inc. All Rights Reserved.

The projections of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

The practice of investing a fixed dollar amount on a regular basis does not ensure a profit and does not protect against loss in declining markets. It involves continuous investing regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of fluctuating market conditions.

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Sylvia Kwan

Sylvia is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios, and develops the algorithms behind Ellevest’s investment recommendations.