Inflation is a quiet but relentless force that can silently erode the value of your hard earned money over time. While maintaining a cash emergency fund equivalent to 3-6 months of living expenses is recommended, holding excessive amounts of cash is akin to holding a melting ice cube.
Invisible Theft
Inflation is the gradual increase in the prices of goods and services over time, resulting in a decrease in your purchasing power. When inflation occurs, the same amount of money buys fewer goods and services than it did before.
A Losing Strategy
The conventional wisdom of stashing away large sums of money in low-interest savings accounts might seem secure, but it overlooks the corrosive effects of inflation. Assume annual inflation is 5%, and interest rates are 2.5%. If you had S$200,000 in cash savings, the purchasing power of this over a 10-year period will decrease to approximately S$150,000.
You work hard for your money. Your money should be working hard for YOU.
Whilst your cash might not be yielding significant returns for you when sitting in your bank account, it’s crucial to recognize that banks operate on a different playing field. When you deposit money into your bank, they don’t merely let it sit idly. Instead, they leverage it to provide loans and credit to other clients, and in doing so they generate significant returns for themselves.
Balancing Risk and Liquidity
Striking the right balance between risk and liquidity is crucial for providing both security and the growth potential. Low-volatility investments have the potential to generate returns above inflation while maintaining a higher degree of liquidity. These alternatives offer a compromise, allowing your money to grow at a pace that outpaces inflation without sacrificing accessibility in case of unexpected financial needs.
