Is Holding onto Excess Cash A Good Strategy?

According to a recent NerdWallet survey, Americans hold just over $32,000 in cash on average, but don’t invest it anywhere due to fear or ignorance. Cash can provide a safety net, especially when the market is erratic. But it may not be helping your wealth management goals as much as you’d like it to.

While it’s important to build up an emergency savings fund (the general recommendation being three to six months worth of income), holding on to more than that may lead to negative outcomes. In fact that strategy, in the long run, could cause you to lose more money than you think.

The Disadvantages of Holding onto Cash

While holding onto excess cash can make you feel better, keeping rather than investing your cash assets could have unintended consequences:

Missed financial growth opportunities: Thanks to inflation, your purchasing power decreases when you hold onto excess cash.
Not thinking carefully about spending: Having cash on hand can lead to some reckless financial decisions. You’re less likely to think through what you’re actually spending if you believe you have enough liquid assets to last over time.
Low rate of return: Compared to investments or bonds, the average bank account has about a .06% return, so you wouldn’t be growing your wealth in any real way.

What You Can Do Instead

Instead of holding onto excess cash, consider these alternatives.

Fund conversion into a Traditional or Roth IRA.
Real estate investments
Bonds
Money market funds

If you’re still feeling skittish about investing in the stock market, it would be a good time to talk to a Chatterton & Associates advisor about which portfolio options may be best for you. Your advisor can discuss your comfort level concerning portfolio risk, and ensure your investment portfolio is diversified to your liking. If you have any questions about how to invest your excess cash, contact us today.

Sincerely,

The Team at Chatterton & Associates