Chicago man has $300K in cash at home, with another $400K in a savings account. Here's how The Ramsey Show says he can turn his savings into $2M

When Stewie called in to the show looking for advice, co-hosts Jade Warshaw and Ken Coleman applauded him for saving so much, but also advised him to stop stuffing it all in drawers.

If he were to invest that $300,000 into the stock market while also investing $500 a month — an amount Stewie said he’s comfortable with — compound growth could potentially turn it into nearly $2 million by retirement, according to Warshaw and Coleman.

Here’s how that math works, and why leaving large amounts of money in cash and avoiding the stock market can be costly.

Related: How to build a nest egg your grandkids will thank you for

Why keeping cash at home can cost you

Cash stored at home doesn’t earn interest, which means its purchasing power gradually erodes over time as living costs rise. Over a decade, those losses can really add up.

For example, according to the U.S. Bureau of Labor Statistics’ CPI inflation calculator, $300,000 in January 2016 would need to grow to about $411,857 by January 2026 just to maintain the same purchasing power. That means money kept in cash over that decade effectively lost more than $110,000 in real value (2).

“We need to harness the power of compounding interest, and when it's at home, there's zero compounding interest,” said Warshaw. “As a matter of fact, it's almost negative. It's depleting the value of your money because [of] inflation.”

One option, Warshaw added, is parking the money in a high-yield savings account and “maybe get 3.5% or 4%.” That would at least help the money keep up with inflation, which has averaged roughly 2.5% annually over the last 20 years (3).

However, Warshaw advised against that option, too, suggesting the best option, particularly since Stewie has no retirement savings, is investing in the stock market.

“If you were to invest it in … [a] basic index fund … [or a] mutual fund … you could really have an average annualized rate of return of around 10%, like you could pretty much bet on that,” she said.

Why Stewie hasn’t invested yet

The data above led to an inevitable question: why had Stewie so far refrained from investing any of his money? Stewie admitted that he was “fearful of the stock market,” largely because of stories he’d heard from his grandfather about the Great Depression.

The hosts explained that while fear is understandable, it can hold people back from building wealth, and they encouraged Stewie to focus on long-term data rather than short-term anxiety.

“Yes, there's been downturns, but usually it [the stock market] recovers very quickly within the next year or two after it’s fully recovered, and then some,” said Warshaw. “And so the point of the stock market is it's a long-term ride. It's not something you hop in and hop out of.”

How Stewie’s savings could potentially grow to nearly $2M

During the call, the co-hosts pulled up an investment calculator to illustrate the potential impact of long-term investing.

They walked through a simple scenario based on Stewie’s situation:

• Invest the $300,000 in cash into an index fund
• Contribute $500 per month going forward from his salary, which is the amount Stewie said he’s currently able to save
• Keep investing for 17 years, from age 50 to 67

Inputting those numbers and assuming an average 10% annual return, the co-hosts concluded that Stewie could end up with about $1.89 million by retirement.

Of course, investment returns aren’t guaranteed. Markets fluctuate, and future performance may differ from historical averages. Still, long-term data suggests that investors who put money in broad index funds and stay invested through downturns tend to come out ahead.

The example above illustrates the potential power of compound growth. Earning returns not only on the original investment but also on accumulated gains can dramatically accelerate wealth building. And for late starters like Stewie, with significant capital to invest and well over a decade of working years ahead, the results can be surprising.

What The Ramsey Show advised him to do with the rest

As it turns out, the $300,000 in cash wasn’t the only money Stewie had saved.