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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.
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?
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.