Why is it generally considered a poor financial decision to simply hide money in a safe place rather than investing it in securities?

• A. Because hidden money does not earn interest or returns and loses value over time due to inflation.
• B. Because hiding money increases its value through compounding interest.
• C. Because hidden money is automatically taxed at a higher rate than invested money.
• D. Because hidden money is insured by the government against all risks.

Answer: (A)

Verified step by step guidance

1. Understand the concept of inflation: Inflation refers to the general increase in prices over time, which reduces the purchasing power of money. This means that money hidden in a safe place loses value over time because it does not grow to keep up with inflation.
2. Learn about investment returns: Investing money in securities, such as stocks, bonds, or mutual funds, allows it to earn returns through interest, dividends, or capital appreciation. These returns help grow the value of money over time.
3. Compare hidden money versus invested money: Hidden money does not earn any returns, while invested money benefits from compounding interest or returns. Compounding occurs when earnings are reinvested, generating additional earnings over time.
4. Understand the role of taxation: Hidden money is not automatically taxed at a higher rate than invested money. However, certain investments may offer tax advantages, such as tax-deferred growth or lower tax rates on capital gains, which can further enhance the value of invested money.
5. Clarify government insurance: Hidden money is not insured by the government against risks. However, certain investments, like bank deposits, may be insured up to a limit by government programs (e.g., FDIC insurance in the U.S.), providing a level of protection for invested funds.