Before I begin this article, I want to say, yes, the title is an exaggeration and an extreme generalization, and very clickbait-y, however, it does have an element of truth to it. Over the last few weeks, I’ve talked about inflation a lot, and in great detail. I explained how inflation is the reason money loses “value” over time: the same amount of money can buy fewer goods and services over time. I also discussed the different causes/types of inflation, and why it exists (and will continue to exist) for years to come. So, if you've read any of my prior articles, you know that it can be safely assumed that inflation will remain a concern to anyone who is saving money for the long term and hopes to use it in the future.
With that said, let me explain the title. The phrase “cash is trash” is often thrown around on financial podcasts, blogs, and videos. What does this phrase mean, and does it have any basis? Well, the answer to the second question is “yes”. The answer to the first is a little longer.
“Cash is trash” refers to the fact that when cash is left alone, it cannot provide returns in the form of growth or interest. With inflation whittling down the purchasing power of cash every year, uninvested cash is seen as “trash”, useless and vulnerable. Simply put, this phrase tries to demean holding cash and attempts to encourage some form of investment.
While this is a blanket statement and isn’t entirely true, it definitely does have a basis. Let's first discuss when cash isn’t “trash”, and then explore situations in which cash might not be the most prudent method for saving
Firstly, everyone should keep some money in cash as emergency savings; depending on your situation, you should consider keeping anywhere from 3-12 months worth of expenses aside in the case of an emergency. This should always be kept in cash, no matter how damaging inflation is. Similarly, if you plan on needing quick(ish) access to your money, like if you’re nearing retirement or have a medium-term goal (purchasing a car or home), it's always important to keep your savings in cash. This is so your money can be easily withdrawn when you need it, unlike if you had invested it and the investment hadn’t done so well or was illiquid (hard to sell). Similarly, consider cash when you want absolutely 0 risk, with no chance of losing your money at all, no matter what the potential upside is. Determining if cash is best for you is dependent on your situation, so if you’re unsure of what to do, take the safe route and consult a registered financial advisor.
In most other cases, especially when you don’t plan on touching your money for many years, it's probably not a great idea to keep your savings in cash. This is, of course, due to the damaging nature of inflation. Keeping your money in cash will lead you to have a lot less buying power than you expected when you do withdraw your savings. This means you’ll have to spend a lot more dollars to buy regular goods and services (haircuts, food, gas) than you would have when you started saving.
Why is this bad? Let me explain using an example. Let's say you saved $10,000 in 1990. You don’t invest this money, and let it sit around in cash. Inflation does its thing, and today, 21 years later, your real buying power is cut in more than half. This means an item that would have cost $1 in 1990, when you started saving, now costs over $2. So, if you could have brought a brand new car with your $10k when you started saving, you’d need $20,000 today to buy that same car. Similarly, a $5 loaf of bread in 1990 now costs over $10.
This change is due to inflation, and why many consider cash to be “trash”. If you had invested that same $10k in inflation-protected security provided by the US government, as I talked about in a previous article, you would have had well over $20k today, and if you had invested in the S&P 500, a stock index that tracks 500 US companies, you would have had nearly $110,000 today.
Investing in assets that provide growth or interest is a great way to protect yourself from inflation because the growth/interest provided helps make up for the buying power you lose. Simply put, you'll be able to afford items even when they increase in price just because you have more money (from interest/appreciation). So, using the previous example, if you had invested in the S&P 500, it wouldn't matter if the price of a haircut went up from $10 to $20 because you had $120,000 to spend.
In short, if you’re looking to save money for the long term, you should seriously consider investing in, at the very least, inflation-protected securities. There are literally thousands of investment possibilities, ranging from businesses to the stock market to cryptocurrencies to gold, the list goes on and on. In the following weeks, I’ll discuss one popular yet simple investment strategy called the Three Fund Portfolio. This strategy revolves around minimalism and "hands-off" investing, so it's perfect for those who don't want to conduct lots of financial research.
Leaving your savings uninvested can be extremely damaging in the long run, as inflation is likely to seriously degrade your buying power and leave you with significantly less realized buying power than when you began. I hope this helped explain the common concept of “cash is trash”, and always, remember that every situation is different so statements like this one aren’t always true. Make sure to consider your goals and surroundings before making a financial decision, and consult a financial advisor if needed.
With that said, thank you so much for reading this week’s article. See you next Wednesday!