“Cash is king!” People proclaim this all the time!  If you have cash you can do anything, but what is the true cost of cash?

This week, we met someone that came on the course in 2022 and has left her money in cash since.

Alan Donegan staring at cash whilst feeling sad about losing money

I thought cash was king? Should I change my mind?

She was scared of investing.  The Donegans didn’t alleviate her fears during the 2022 course, she didn’t take action and she kept her money in cash.

You might be thinking, well that isn’t too bad is it?  She kept her money in cash but at least she has all of her money still!  Well is that true or is there a bigger cost to keeping your money in cash!?

The true cost of cash

Katie got excited about creating a graph to show the cost of not investing.  She set up a spreadsheet, beavered away for a couple of hours whilst I wrote this article and she found out the true cost of leaving your money in cash!

There are two main factors at play in this.  The first is inflation.  Every year things get more expensive.  Sometimes inflation is very low and at other times like now (after covid) prices are SKYROCKETING!

The Donegans had been out of the country for 18 months travelling and when we got back we were shocked to see the prices in the UK.   Our first meal back with friends felt like it was 50% more expensive than when we left!

If you leave your money in cash, each year it’s worth a little bit less in terms of what you can buy.  That is why when I was a kid I could buy a Mars Bar for £0.09, and it was huge, and now it is tiny and costs £1.50!  Inflation.  Got to hate it.

How much your money is worth is called your buying power.  If you keep your money in cash you have less buying power over time because of inflation.

The second force at play is the growth you would see if your money were invested instead.  If you take your cash and put it into an index fund, it will grow over the long term giving you a better return, increasing your buying power.

​Let’s go to the charts to se the real impact

Inflation versus investing

There are two lines on the graph.  The blue one shows you the impact of leaving your money in cash, and the green one shows you what would happen if you invested it.

We took £10,000 as the starting point. Imagine you had £10,000 in 2003 and you were scared to invest it so you kept it under the bed in cash!   As you can see the cash line steadily marches down and down and down over the years, getting to the recent years where inflation has been higher, where you can see your money takes a sharper nose dive at the end.

The impact of this?  You still have £10,000 at the end, but the equivalent buying power is £5,922!

By keeping your money in cash you take a GUARANTEED LOSS!  You lost over 40% of your buying power!  Isn’t that crazy.  Do you still believe cash is king?

For the Donegans invested money is king!  Our investments are what makes us wealthy over the long term.

FEAR!

The lady that came to our event was scared of losing her money.  She was petrified.  That fear made her freeze and do nothing.  What she hadn’t realised was that inaction was locking in a guaranteed loss and actually creating what she was most afraid of!

We humans create what we fear.  We have fear of losing money so we do things (like keeping the cash) which cause us to guarantee what we fear.  Human beings are fascinating.

What are you afraid of? Losing money? Causing problems?  Something else?

Positive returns

If you had taken your £10k and invested it in a low cost index fund, it would have grown over the years instead of slowly devaluing (we used the S&P 500 for the graph since it has a long data history).  After the same 20 years, instead of having a £4k loss, your £10k would have grown to an inflation-adjusted value of £27,044.

You would have nearly tripled your money.

​What does inflation-adjusted mean?  It means your money would have actually grown to £47k which is the equivalent of £27,044 in 2003.

Is that crazy?

Fear stopped the Donegans investing for YEARS!  I (Alan) lost my life savings in a stock market crash and an actively managed fund in 2001.  That stopped me from investing for 14 years!  I missed out on 14 years of stock market growth because of fear.

Tackling fear head on

,What we want you to do is tackle your fears head on.  Look at the fact you are petrified of investing, losing money, or what ever it is and understand your fear.

Fear is designed to keep you safe.  Some fear is actually a good thing.  I am afraid of heights to a certain extent, I am afraid of getting hit by a bus as I cross the road.  This fear doesn’t paralyse me, it inspires me to be a bit more cautious and look both ways before crossing the road, or not to get too near the edge when I am at the top of a building.

Fear can be a useful emotion, but when it paralyses you it can cost you dearly.

Identify your fear.  Talk to people who do what you want to do and start to understand what is truly going on.  If you are afraid of investing come on Rebel Finance School, ask questions, talk to other people and work out the cost of not taking action.

Sometimes the pain of inaction can be bigger than the pain of action.  Use this to motivate yourself to get on with what you actually need to do!

Leaving your money in cash is a guaranteed way to lose.

Don’t let fear stop you from taking action and working to build the financially secure life that you desire.

New resources

This week Katie has updated the impact of fees calculator and we have created a video guide of how to use it.

Please use this tool to assess the fees on your existing investments and pensions to help you understand the impact of those fees.  1% doesn’t sound like much but it can destroy your financial future over the long term.

Don’t just accept the default.  Take control of your finances!

Join the Donegan mailing list

7 Comments

  1. Tamarin June 21, 2024 at 10:20 am - Reply

    Hi Alan & Katie, what do you recommend how to manage sequence of risk as I am 2 years more before I retire. 50% of my networth is invested in index growth fund which I hope not to draw down for next 10 – 15 years. One school of thought was to stash away cash (10%) as a buffer to manage sequence of risk. This does mean there a cost in doing this as you have illustrated in this article. Would appreciate your thoughts. Thanks

    • Alan Donegan June 21, 2024 at 1:41 pm - Reply

      Tamarin, what a lovely and thoughtful message to get. I would need to understand a bit more as the first question from your comment is, if you are as low as 50% in index funds what is the rest of your net-worth in? do you have 50% bonds? And then my second question was why don’t you want to draw down on the index funds for so long? What is the reason for waiting for 5-10 years?

      • Tamarin June 23, 2024 at 9:44 am - Reply

        Hi Alan, thank you for your quick response *surprise. I was trying to summarise in my previous post. Breakdown of networth:
        39% mortgage free home (rented drawing about $5k per year after expenses),
        51% in investment (68% index fund, 11% in a managed fund and the rest 21% in employer fund)
        10% in cash (for 2.5 years expense to buffer sequence of returns risk).

        I am invested in my home country low fee index fund and asset allocations is 80% growth, 20% income assets. My asset allocation is not in VTSAX for VBTLX. No I do not have bonds. The plan is for the index growth fund to continue to grow my wealth over time and leave that alone, and use the cash, draw down from the managed fund and employer fund, supplemented by my pension and hopefully that will last me 10-15 years before I need to touch my index fund.

  2. Tamarin July 5, 2024 at 8:27 am - Reply

    Hi Alan and Katie, Is 10% in cash too high – any thoughts

    • Alan Donegan July 5, 2024 at 6:09 pm - Reply

      Hey Tamarin, sorry for the slow reply. A few thoughts. Just my ideas:

      1. How long will the 10% cash last you and why do you have such a bog emergency fund / living fund? The more you have in cash the more it drags you down in terms of performance.
      2. VBTLX is a total market bond fund. Are you saying you do have that? Is that your growth fund?
      3. Have you done an ROE calculation on the investment property? Do you know what you return is? Are you holding it so you can move back in at some time or is an actual investment?
      4. Why do you not want to touch the index funds? The idea is that they grow fastest and you can use them to find your life. By avoiding using them you are allowing them to compound and grow faster but you are countering that by having so much outside that isn’t growing so this doesn’t quite make sense to me.
      5. What is the managed fund? managed funds normally have higher fees and worse performance than index fund. What is the fund? What are the fees? Is there a reason you are sticking with it? Have you compared it’s last 10 years of performance to a simple tracker?

      Some ideas and questions. Difficult to get the full picture over text but I am hoping this will point you in the right direction.

      Are you coming to RFS this year? Investing weeks start soon and you might enjoy those!

      Alan

  3. Tamarin July 7, 2024 at 8:55 am - Reply

    I have followed 2023 and now 2024 but on ‘delay telecast’ on YT and you both are doing a fantastic job. Long story short, I have done the ‘math’ on the questions you have posed. I suppose with retirement round the corner I am trying to put a strategy to mitigate sequence of return risk and perhaps stashing too much in cash instead on investing but as you know the bear market in 2022, the funds took a hit, which is ok, as I was expecting to ride through it anyway, and hold fast. So bracing in the event when I retire, I hit a bear market and do not want to sell my shares, hence the long term ‘do not touch’ where possible of the growth fund (some rebalancing will be considered) when my cash fund goes down and living expenses still need to be cater for.

    • Alan Donegan July 7, 2024 at 9:13 pm - Reply

      Hey Tamarin, so glad you have enjoyed the course! YAY. Now this is making sense to me. How close is retirement? Glad you have been having fun working through the maths!

      On the bear market of 2022 did your funds really take a hit? Or are they significantly high now than they were. It always comes back it is just the amount of time and that is the bit to consider. How long do you want to be able to leave the index funds if it does crash? I would suggest 10-15 years is way too long. A lot of people talk about being able to survive 2 years if it crashes but there are a lot of elements to this. If you have money in bonds then that money will cover you for that period too so it is not just about cash.

      What are your biggest fears that you are trying to mitigate? Love the responses you give by the way! alan and katie

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