- It is important to keep money in a savings account for emergencies.
- Once your emergency fund is full, investing your extra cash is a smart move.
You will often hear that your first financial priority should be to build up an emergency fund. And to that end, a good goal is to accumulate enough money in your savings account to cover three to six months of essential expenses. (Some experts, in fact, say having up to a year of cash spending is a good bet.)
But what if you have savings beyond what you need for emergencies? Should you also keep this extra money in the bank?
According shark tank Kevin O’Leary, that’s actually not a wise decision at all. In fact, with soaring inflation, keeping too much money in savings is a giant mistake.
The downside of savings accounts
A savings account is a nice and safe place to keep your money. But you won’t see much growth on your money if you save it for years. Indeed, even during times of higher interest rates, savings accounts simply don’t pay that much. On the other hand, if you invest your money in a brokerage account, you will have the opportunity to grow it into a much larger sum – and you could generate five to 10 times the returns you would get in a brokerage account. saving.
O’Leary especially thinks now is not the time to keep too much money in the bank, given soaring inflation. In fact, if you put too much money into savings, O’Leary says, you will effectively lose money because the growth you see in that account won’t be enough to keep up with the rising cost. of life.
Also, keeping too much money in a savings account over time could make it difficult for you to comfortably manage your expenses in retirement. This is because a dollar today will have less purchasing power in the future, so you need to invest for your retirement years in a way that tracks 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 follow investment giant Warren Buffett’s advice and invest in broad-based index funds.
Index funds are passively managed funds, and their goal is to match the performance of different indices, like the S&P 500. They are an easy way to get instant diversification in your portfolio without having to research dozens of different companies. (and diversification can help you take advantage of growth and minimize losses).
In fact, O’Leary says you might want to focus on S&P 500 index funds. That’s because historically, the S&P 500 index has done well to outperform inflation.
Of course, if you’re up for the challenge of picking stocks by hand, you can also build yourself a nice portfolio this way. But if not, there’s absolutely nothing wrong with taking the easy 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 risk by doing this, but in reality, you’ll be taking another risk: that your money won’t grow fast enough to provide you with a comfortable lifestyle in the future.
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