Well, usually. Buffett’s company, Berkshire Hathaway, is currently sitting on a cool $109 billion as he considers his next big business move. While that may sound like a great thing, hoarding too much cash (outside of an emergency fund) can actually work against you. Not only is money in your savings account not growing as much as it could, but thanks to inflation, its value could actually be decreasing.
Buffett acknowledged as much in his shareholder letter in February, writing: “Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”
Of course, most of us don’t have billions on hand. But you can make sure the cash you do have is working effectively for you. Here’s how.
1. Invest more for retirement.
For long-term goals like your post-work life, you can seriously benefit from compounding. That’s when the interest (or returns) on the money you invest starts earning interest, too, and so on. The result: exponential growth.
So the earlier you prioritize this goal, the better, even if you start small and increase your contributions incrementally. If you’ve got access to an employer-sponsored retirement plan, aim to contribute at least enough to recoup any company match to start. No 401(k)? Open an Individual Retirement Account (IRA) and you can sock away up to $5,500 per year.
2. Invest for medium-term goals, too.
From buying a home to starting a side business, you’ve probably got some mid-term financial goals in mind. Like with retirement, you’ll get there a lot faster by letting your money start growing early on. The trick is to ensure your investments match your risk tolerance and timeline. Generally, the more time you have before you need the money, the more you can invest in stocks versus, say, bonds. (While the stock market has risen significantly over time, it’s not a straight line—so you want to have time to ride out any bumps.)
3. Pay off expensive debt.
Like inflation, debt works against our efforts to build wealth. The more high-interest debt you carry, the harder it is to boost your net worth—making paying down that debt faster a worthy use of extra cash. Start with expensive debt with high interest rates (think: credit cards, auto loans and personal loans) before moving on to mortgages and student loans.
Don’t forget that paying off debt means you’re saving on debt and interest payments—so you’re freeing up even more money to put to work for you.
4. Invest in yourself.
Always wanted to earn your master’s or enroll in classes to brush up on some professional skills to take your career to the next level? Sometimes, spending a little money can pay dividends when it comes to your earning potential.
But it doesn’t always have to be that straightforward to be a good investment. Even though a yoga class or SoulCycle package might not help you earn more, the happiness or health benefits it brings could still be worth more than the .09 percent you’re earning on your cash in a savings account.
March 8, 2018