Is it better to save money for retirement in physical cash or in a bank account? Here are the pros and cons of each.
Saving some of your retirement money in physical cash can have a few benefits, but keeping all your savings in cash is generally a bad idea. You might like the idea that keeping your money in cash protects it from potential online theft and fraud, but holding lots of cash in your home is actually a lot much more risky than you'd think.
Advantages of keeping retirement savings in physical cash
The main argument for keeping your retirement savings in cash is that you can keep a close eye on it, but there are a few other benefits too.
- You can see it. Being able to physically see your money in wads of notes in your house is comforting for some people who are a bit skeptical of online accounts.
- No investment risk. If you keep your money in cash, you have zero risk of it losing value in the stock market. However, the opposite is also true and you have no opportunity for it to gain value, either. Plus, it'll lose value with inflation (we've explained this below in the disadvantages).
- Greater sense of control. If you have your money in a bank account, there are limits around how much you can spend each day. With cash, no limits apply.
- No bank fees. If there's one way of making sure you don't pay any bank account fees, it's keeping your money out of a bank account.
Disadvantages of keeping retirement savings in cash
While there are a few small benefits, the reality is that there are several major disadvantages to saving for your retirement in cash. Some of those disadvantages include:
- Risk of theft. Holding large sums of cash in or around your home is incredibly risky and makes you a prime target for thieves if anyone was to find out where it is stored.
- Risk of it being destroyed. Cash is just thin plastic and it's not indestructible. It can easily be destroyed by fire or flooding, as well as less extreme risks like a child cutting it up by mistake.
- Lose value with inflation. With inflation at around 2-3% a year, your money is actually losing value if stored in cash. This means a $50 note will buy around 2-3% less next year than what it can buy today, as the cost of household items and groceries go up. Keeping your money in a bank account that pays interest will help your cash keep up with inflation.
- No investment growth. Keeping your money in cash means there's no chance of it growing in value. If you instead had some of it invested in products like shares, it has a much better potential to grow in value over the long term.
- Hard to get paid in cash. Even if, after reading this, you still want to keep your money stored in cash it's actually quite tricky to do so. Most employers will not pay staff in cash, so you'll need to set up a bank account to receive your pay anyway, then withdraw it in small chunks. Don't worry, there are heaps of fee-free bank accounts to choose from.
Is keeping your money in a bank account safe?
Some people prefer to keep their money in cash as they think it's safer than keeping it in the bank. However, the opposite is actually true. Australian banks are all highly regulated and have entire teams dedicated to protecting the money that consumers deposit. Banks have sophisticated online protection systems that monitor customers' accounts 24 hours a day for any suspicious activity, theft or online fraud.
As well as this, your money up to the value of $250,000 deposited with a licensed Australian bank is guaranteed by the government under the Government Guarantee Scheme. This means that in the unlikely event that something were to happen to the bank, your money would be safe.
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