Many people are taught from a young age that “cash is king.” From tooth fairy money to allowances to first paycheques, there are few things as gratifying as seeing our cash balances rise over time (whether they’re held in a piggy bank or a bank account). What many people may not learn until later in life is that holding too much uninvested cash can be counterproductive — and may even harm their ability to save for retirement.

With the COVID-19 pandemic making everything from the markets to job security feel uncertain, a greater number of Canadians are no doubt keeping more of their cash in their bank accounts rather than in market-based investments such as mutual funds. Plus, with Canadians spending less money — on restaurants, shopping, and vacations — people may have more cash on hand than usual.

“We know there’s a lot of idle cash around, whether it’s a direct result of spending less or because market volatility and uncertainty have caused Canadians to withdraw from their investments,” says Agnes Vandenberg, Vice President of Personal Savings and Investing at TD Bank. “But holding so much uninvested cash may not be the best option to help Canadians achieve their long-term goals.”

What is the issue with holding uninvested cash and what can you do about it? We can help explain.

Cash may not generate meaningful returns

The biggest downside to holding cash? It does not increase in value over time. Yes, financial institutions will pay you a small amount for holding your money in a savings account, and you can lose money in the market, but many investment options have historically outperformed savings account–related interest. Although past performance is never a guarantee of future results, many mutual funds have averaged better than 5% return over the last 10 years.1 Some have delivered higher returns, although they would also have come with higher risk. The point is, those investments would have outperformed the zero to 2.5% or so you might earn in interest in a traditional savings account.

Cash does not keep up with inflation

Since cash doesn’t rise meaningfully in value, it may not keep up with inflation. Inflation refers to the annual increase in the price of goods. Historically, the cost of everything from groceries to clothing rises between 2% and 3% per year. Here’s an example of how inflation could decrease the value of your cash:

Let’s say you plan to buy a new computer next year and so you put $1,000 aside to buy a new PC, which also costs $1,000. At the end of the year, you might have about $1,010 in the account with the bank providing 1% interest. But if inflation rises by 2%, then the PC might now cost $1,020 which is $10 more than you saved. Now think about all the things you want to do in retirement and how much it could all cost in the future if inflation continues to rise by 2% each year. If your money is in cash versus market-based investments that have the potential to generate higher returns, your savings may not cover your future cost of living.

Understand the role of cash

If cash can’t generate enough returns and it can lose purchasing power over time, then why hold any at all? Cash can be ideal for short-term or emergency savings. If you know you’ll need access to your money within a year, then it can be worth keeping cash around. Maybe you know you‘ll be doing a renovation in December, and plan to start saving in January. You can put that cash in a bank account, where it has no chance of losing value in the market. Having easy-to-access emergency savings is important, too. If you, say, unexpectedly need a roof repair, it’s going to be fastest and easiest for you to tap into a savings account. But for any longer-term savings, it can make more sense to put those funds in the market.

Put your cash to work

How can you grow your cash savings? You might consider investing in a mutual fund. The type of fund you invest in will depend on a variety of factors, such as how many years you have until retirement, your tolerance for market risk, your short- and long-term financial goals and more. You can see an example of how an investment might have fared over the last 10 years below. It can be a good idea to talk to a financial advisor to determine which products would be suitable for your situation.

Source: TD Asset Management. Chart data represents period between December 1, 2009 and November 30, 2019. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. 1 Source: Interest rate is based on the per annum rate of 0.05% listed for the TD Every Day Savings Account as of December 30, 2019 on TDCanadaTrust.com, compounded over a 10-year period. 2 Source: Morningstar direct. Based on annualized returns over 10-year period of the average interest rate of 1, and 5 year GIC's. Annualized returns to November 30, 2019. 3 Source: TD Bank. Based on annualized average returns over 10-year period of TD Market Growth GICs. Annualized returns to November 30, 2019. 4 Source: Morningstar direct. Based on annualized return over 10-year period of the Global Neutral Balanced Benchmark. Annualized returns to November 30, 2019.

Invest at your own pace

If you’re sitting on a lot of cash now, and if you’re still feeling uncertain about the COVID-19 pandemic, then you may want to consider the benefits of dollar-cost averaging. That means putting a little bit of money into a mutual fund every month rather than transferring all your cash at once. If you put everything in at once and the market were to tumble a week later your portfolio could fall by a lot. Instead, spread it out and take on less short-term risk. You may lose out on some gains, but it’s more important that you’re investing on a regular basis.

As you can see, cash isn’t quite the king some people have made it out to be. Everyone loves to accumulate more money, but it can be even better to put it into an investment vehicle where it has the potential to grow. Talk to an advisor to help you decide how to invest that cash.

“Have a conversation,” says Vandenberg. “An advisor can help you think about the goals you may have for yourself, help you stay on track and achieve the aspirations you have set for yourself.”

BRYAN BORZYKOWSKI

MONEYTALK LIFE

ILLUSTRATION

DANESH MOHIUDDIN