Cash Is A Depreciating Asset

by B. Rich on July 9, 2012 · 2 comments

in Finance

Cash is a depreciating asset!  Whew, I’ve wanted to say that for a very long time.  I’m so happy that this is a personal blog because had it been a professional blog I may have been excommunicated, banned, or forced into exile from the financial community.  I assure you, with great risk do I write this post because cash is king and as Wu-Tang told us, cash rules everything around us, and I agree.  How-be-ever, as powerful as cash is and as powerful as cash can be, cash is a horrible long-term investment.

I received a letter from a well known financial institution and it said, “Boost Your Savings.”  The letter went on to offer me the opportunity to open a high yield savings account paying a whopping .85% .  Your eyes aren’t deceiving you, that’s 0.85%, less than 1%.   The offer prompted me to take a looksey at my most recent savings account statement and chile boo, the interest paid was laughable.  In fact, I’m laughing now.  Really.  I am.  Even without taking any withdrawals, I have less money today than I did this time last year.  Ok, technically not less money, but less purchasing power.   Let me paint a picture for you but first consider the following definitions:

  • Asset:  a valuable item that is owned.
  • Depreciation:  a decrease or loss of value because of age, wear or market conditions.
  • Inflation:  an increase in consumer prices
  • Purchasing Power:  the ability to purchase.

So on with the example …

Assume a basket of goods cost $1,000 last summer.

Let’s use the .85% as the going interest rate, which I assure you it’s not.  The average interest rate on a regular savings account is actually lower, if you can believe that.   So say last summer I put $1,000 in this high yield savings account, earning .85%.  Exactly one year later I would have ($1,000 + .85% interest earned)  $1,008.50.

Per the most recent published inflation rates, inflation has been as high as 3.6% and as low as 1.7% over the last 12 months, so let’s go with something in the middle, say 2.65%.   What this means is the price of consumer items went up 2.65% for inflation alone.  ***Some of you work for companies that give a COLA, or cost of living adjustment each year … that’s their way of keeping incomes on par with inflation.

The basket of goods was $1,000 last summer but that same purchase, thanks to inflation, now costs ($1,000 + 2.65% inflation rate) $1,026.50.  That’s $26.50 more than the previous year.

Are you beginning to see the picture?  I saved $1,000 and with interest, I now have $1,008.50.  That’s not enough money to purchase the items that used to be $1,000 but now cost $1,026.50 because of inflation.  I’ve essentially lost $18 of purchasing power ($1,026.50 new purchase price – $1,008.50 my money plus interest).

DO NOT, and I repeat, DO NOT run to your banks and withdraw all of your savings.  LOL!  Although cash is a depreciating asset, it does have a place in everyone’s financial plan, however, that place is not as a long-term investment, in MY opinion.  As a long-term investment, cash is a depreciating asset.  There are far superior long-term investment options (#TrustMe), but understand this, as the reward potential increases, so does the risk.

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2 comments on “Cash Is A Depreciating Asset

  1. *EYE OPENING* As simple as you’ve made it sound, I almost feel like I already should have known this.

    Not being a “numbers” person myself, I’m the type that needs things like this explained on a first-grade level, which you’ve done well.

    I’m looking forward to seeing what you have to say about what ARE better long-term financial investments.
    Kymberli aka JW Moxie recently posted..Rock Out with Your Socks and Tattoos Out in Remembrance of Nancy

  2. I’m all about a common sense approach to money matters. There’s no reason why it should have to be complicated;-).

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