Financial experts at investment management firm Vanguard say keeping too much of your savings in cash, tucked under your mattress or in interest-free bank accounts, can quietly kill your wealth-building potential.
That’s because inflation erodes the purchasing power of cash over time. For example, $126 will be as much as $100 in 2020 in 2026, according to data from the Bureau of Labor Statistics.
According to the Federal Deposit Insurance Corporation, the average interest rate on traditional savings accounts is just 0.39% per year. Meanwhile, the overall inflation rate was about 2.4% in January 2026, according to BLS data.
According to Bankrate, some high-yield savings accounts allow you to earn up to 4% per year on your cash, but most people earn far less than that. More than half of Americans say their savings earn less than 3% interest, according to a January 2025 Vanguard survey of more than 1,000 adults. Nearly a quarter of respondents said their savings earn less than 1% interest.
“I think the reason people hold on to excess money is because it feels safe, but it can also quietly erode the progress investors are making toward achieving their long-term financial goals,” said Kathy Kellert, head of index equity products at Vanguard.
how to deal with inflation
Investing your cash in the market helps you protect yourself from inflation and preserve your purchasing power. According to a CNBC analysis, the S&P 500 index, the benchmark for the entire U.S. stock market, posted an average annual return of about 13% from 1976 to 2025.
“[Cash]provides stability and liquidity, but it rarely keeps up with long-term investments, which means savers can lag behind building real wealth,” says Jordan Gilberti, a certified financial planner and founder of Sage Wealth Group.
Let’s say you put $1,000 into a savings account that earns the national average of 0.39% per year. Assuming no additional contributions, the account will be worth approximately $1,040 after 10 years. However, accounting for 2.5% annual inflation, the cash would be worth about $812 in today’s dollars, according to CNBC Make It’s calculations.
Now let’s say you invest $1,000 in the market and earn a 10% return per year. After 10 years, your investment will be worth approximately $2,594. Even accounting for 2.5% annual inflation, that translates to approximately $2,026 in today’s dollars.
“Cash plays an important role in financial planning, primarily for short-term needs and emergencies, but it is not designed to foster long-term growth,” Gilberti says. “Allocating too much (of your savings) to cash can create a false sense of security and quietly erode your future purchasing power.”
Kellert recommends investing as early as possible because you have more time to benefit from compound interest. Compound interest occurs when the return on your initial investment is added to your principal and the interest increases on both, doubling your money.
Kellert recommends investing in an index fund that tracks the S&P 500 first. This is because it provides broad market exposure and reliable returns. Index funds also typically have lower fees than actively managed portfolios, she says, meaning “more money stays invested in the market.”
How much cash should you hold?
However, there are good reasons to keep some of your money in cash, including everyday expenses and emergency savings.
The amount you need for both will depend on your personal financial situation, but experts including Kellert and Gilberti recommend aiming for enough savings in an emergency savings fund to cover three to six months’ worth of expenses.
“How conservative you want to be within that range, or how much of a buffer you want, really comes down to personal preference,” Kellert says.
Kellert also recommends considering two different “buckets” of emergency savings. One responds to “expenditure shocks,” such as repairing a car or home appliance, and the other responds to “income shocks,” such as losing a job or having to take unpaid leave.
It can be difficult to hide six months’ worth of expenses, especially if you’re struggling to meet your daily living expenses. But “every little bit helps,” Kellert said.
She recommends setting up automatic savings to develop good savings habits and using a high-yield savings account to “at least keep up with inflation.”
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