Are you holding too much cash? Here's what to do with it instead

Here’s one of the biggest money management mistakes people make: holding too much cash.

Maybe you just got your bonus. Maybe you just got a raise. Maybe you’ve been putting money into that checking account forever and don’t quite know what to do with it. Maybe you’re worried about the risks in the stock market.

We know it seems counterintuitive. How can it be bad to have extra cash?

In theory, it’s not. But the mistake comes when you hold your excess cash in a bank account instead of investing it in the stock market.

Luckily, that’s a pretty easy fix. But let’s walk through why it works.

How can there be any risk to holding cash in a bank account?

Like we said, it seems counterintuitive. But you’re actually dealing with two risks if you hold cash in a bank account instead of putting it in the market: losing purchasing power due to inflation and missing out on opportunities.

How does the inflation risk work?

If you don’t invest, you can pretty much guarantee that your money will become less valuable over time. Costs of goods and services will rise with inflation, and the cash sitting in your bank account won’t keep up.

Let’s look at the numbers: Per the U.S. Bureau of Labor Statistics, $100 in October 2023 has the same purchasing power of $47.36 in October of 1993. Put another way, that means a 53% reduction in value over 30 years.

What about the opportunity cost? What does that mean?

Money sitting in your checking account isn’t doing anything for you. It just…. sits there. While costs of goods and services rise (see above), that money doesn’t have the opportunity to rise with it.

But isn’t investing risky?

Yes, there are risks in investing. But if you do it right (and we can help with that), the market has a long track record of positive returns when you invest for the long term.

Since at least 1872, there hasn’t been a single 20-year period in the U.S. market where real returns are negative. That means, in general, that if you put your money in the market over a long time, you’re likely to increase your purchasing power and avoid losing money.

If you leave that cash in a checking account, though, you’re almost guaranteed to lose out on your purchasing power.

Can you show how the math works?

We’re nerds. We’d love to.

So, let’s say a 22-year-old is making $45,000 a year with a 3.5% annual raise.

Let’s say that person saves and/or invests 25% of their income every year.

If that person holds their cash in a bank account, they might earn an average of 0.25% interest each year. (We’re being generous here: Most savings account interest rates are lower.) By the time they’re ready to retire, they’ll have almost $1 million – which might not be enough for a comfortable retirement.

But if that person invests in the market and gets an average 7% return (We’re being pessimistic here: This is a lower return than the average of the last 100 years, which is closer to 10% annually), that person ends up with about $4.4 million in their portfolio when they’re ready to retire.

$4.4 million sounds a lot more comfortable — 4.4 times more comfortable, to be exact.

Got extra cash sitting in your checking or savings and not sure what to do with it?

You’re in the right place. Schedule a free one-on-one meeting with a Fifr Financial Wellness Expert here. https://fifr.io/get_started

Check out our website, schedule a free one-on-one call with a Fifr Financial Wellness Expert, or reach out directly. We can’t wait to hear from you.