Holding a stash of cash — even if it loses value to inflation — might make you happier than investing it in the stock market. And that’s true for everyone from the poorest church mouse to the richest fat cat.
In a study posted online last year, three researchers — Peter Ruberton and Sonja Lyubomirsky of the University of California, Riverside, and Joe Gladstone at the University of Cambridge — looked at nearly 600 British bank account holders and asked them about their satisfaction with life.
The researchers then matched up the respondents’ answers to their bank account balances. The results pointed to a surprising conclusion:
Individuals with higher liquid wealth were found to have more positive perceptions of their financial well-being, which, in turn, predicted higher life satisfaction, suggesting that liquid wealth is indirectly associated with life satisfaction.
Why you need to invest in stocks
But before you call a broker and sell all your stocks and mutual funds, know the risks of holding too much cash.
Savings accounts and money market accounts typically pay out less than 1 percent in interest today. That means that after inflation is factored in, your money is losing value in inflation-adjusted terms.
As time goes on, the ravages of inflation can crack a nest egg. Let’s say the fear of taking prudent risks overwhelms you and you simply tuck all your money into a mattress. If inflation runs at 3 percent — which is a bit less than its historical average — the purchasing power of your money will drop by half in just 24 years.
In other words, the happiness and security you feel when hanging on to cash today could turn to anxiety and uncertainty if you don’t also properly invest for your golden years.
While it makes sense to keep some money on hand to serve as an emergency fund, it’s still wise to invest in stocks, bonds, real estate and other assets that should give you higher returns.
Last week, Money Talks News founder Stacy Johnson wrote about the simplest ways to get rich. He pointed out that life is full of risks – “whether it’s money, love or just life in general.”
Stacy urges everyone to educate themselves about the stock market and to invest wisely by not putting all their eggs in one basket. He also writes about the danger that low returns pose to your financial security:
Invest $200 a month at 2 percent for 30 years, and you’ll end up with a little less than $100,000. Earn 12 percent on the same investment, and you’ll end up with nearly $900,000. Taking a measured amount of risk is the difference between getting rich and getting by.
For more of Stacy’s advice, check out “Want to Be Rich? Here’s All the Advice You’ll Ever Need, in 10 Simple Sentences.”
And don’t be afraid to seek help with your finances. Check out “How to Choose the Perfect Financial Adviser.”
Do you like to keep a lot of money in cash? Let us know by commenting below or on our Facebook page.