Unearthing the Truth About “Safe Money” – A Financial Fable and Reality Check
In the early days of my career, I sat down with a client who recounted a most unusual family tale. Her father had recently passed away, and she found herself digging up jars of money from the backyard of her childhood home. The hidden treasure was the result of her father's deep mistrust of financial systems, fueled perhaps by lived experiences and historical events that shaped his views.
He thought burying money was the ultimate safeguard against market risks, inflation, and even institutional collapse. Ironically, by doing so, he exposed his life savings to a host of other risks: theft, decay, and even the risk of the money never being found. This poignant tale serves as a compelling entry point into the complexities of financial risks. While we might not all be burying our money, misconceptions about what constitutes ‘safe money' abound. Here's a more nuanced look at the landscape of financial risks you should consider.
Bonds seem safe, but they're not foolproof. An issuer could default, leading to the loss of both your principal and any expected interest.
This is the risk most people think of, but avoiding it by not investing is akin to hiding your money in a proverbial backyard—exposing it to other types of risk, like inflation.
Inflation is a wealth eroder, silently eating away at your purchasing power, affecting your lifestyle and the profitability of your investments.
Interest Rate Risk
This involves two key aspects:
- Price Risk: When interest rates rise, the value of your existing bonds may plummet.
- Reinvestment Rate Risk: An annuity that once offered high interest rates might mature in an era of low interest rates, reducing your returns.
Tax policies can change overnight. These shifts can have a significant impact on your investments and should not be overlooked.
Exchange Rate Risk
If you’re investing internationally, currency rate fluctuations could either boost or deplete your investments substantially.
An asset that can't be quickly converted to cash may actually trap you when you most need liquidity.
Take Control of Your Financial Future
The tale of buried money in the backyard serves not just as an interesting family legend but as a cautionary tale. It demonstrates how a flawed understanding of ‘safe money’ can inadvertently expose us to other forms of risk. Your best strategy to navigate this intricate web of risks is to consult with a financial professional. Creating a balanced, personalized portfolio is the most effective way to face these financial uncertainties and secure a prosperous future.
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance.
She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help her clients avoid a future tax time-bomb. Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones with less tax burden, planning makes the difference.
Her new book, The Generational Wealth System outlines a holistic approach to preserving lifestyle, wealth and legacy.