When it comes to money, many people believe you can never have too much cash. It feels safe to have a comfy cushion in your bank account, ready for anything life throws your way. And while having an emergency fund is part of a sound financial plan, holding onto too much cash could actually hinder your long-term financial growth.

So, how much cash is too much? And what should you do if you’re sitting on more than you need? Let’s explore why it might be time to reconsider your cash holdings and how to find the right balance.

Why You Might Think Cash Is King

It’s easy to understand why cash feels comforting. It’s tangible and readily available, and there’s no risk of loss from market downturns. The peace of mind that comes with knowing you can cover immediate expenses or emergencies is important.

Most financial experts recommend keeping a cash reserve for emergencies, typically enough to cover three to six months of living expenses. But beyond that, holding large sums of cash may not be as beneficial as it seems.

Why Too Much Cash Could Be a Problem

While cash offers safety and liquidity, it can have some drawbacks if you’re holding onto too much of it.

1. Low Interest Rates: Savings accounts typically offer low interest rates, especially in comparison to other types of investments. Even high-yield savings accounts or certificates of deposit (CDs) often provide lower returns than you might make with a long-term, diversified investment portfolio.

2. Inflation Erodes Cash Value: Cash sitting in a bank account isn’t growing very much, if at all. That’s a problem in an environment where inflation exists. When inflation rises, the purchasing power of your cash decreases. Simply put, what your cash can buy today won’t be the same as what it can buy in five years. If your money isn’t earning a return that keeps pace with inflation, you’re essentially losing money over time.

3. Missed Investment Opportunities: Keeping large amounts of cash means you’re not taking advantage of potential growth through investments. Over the long term, stock and bond markets have historically outpaced inflation, providing opportunities for your money to grow. By sticking with cash, you miss out on those gains. If you want your financial resources to grow and help you meet goals like retirement or major purchases, offsetting your excess cash to investments may be a better strategy.

4. Less Flexibility in Your Financial Plan: Having too much cash on hand can limit the flexibility in your overall financial plan. You might find that your money isn’t working for you as efficiently as possible. Diversifying your assets across various investments can create a more balanced portfolio, allowing you to take advantage of growth opportunities while still maintaining liquidity when needed.

How to Find the Right Balance

The question then becomes: How much cash should you keep on hand? The answer depends on several factors, including your financial situation, upcoming expenses, and overall financial goals.

1. Emergency Fund First: Start by determining your emergency fund needs. A general rule of thumb is to set aside three to six months of living expenses in an easily accessible account. If your job is less stable, you may want to aim for the higher end of that range. This provides a cushion to cover unexpected costs, like medical emergencies or job loss, without dipping into long-term investments.

2. Consider Near-Term Expenses: If you have large expenses coming up in the next year or two (like a down payment on a home or a major vacation), it can make sense to hold additional cash. You don’t want to be forced to sell investments during a market downturn to cover these costs. However, once those expenses are paid for, it’s time to revisit your cash holdings.

3. Put the Rest to Work: For money you don’t expect to need in the short term, consider other options that will allow your funds to grow. This could include a diversified mix of stocks, bonds, or other investments tailored to your risk tolerance and financial goals. Working with a financial advisor can help you determine the best allocation based on your unique situation.

Working with a Fiduciary Advisor

Determining how much cash is enough but not too much is part of a healthy financial strategy. It can be difficult to strike the right balance between having liquidity for emergencies and making sure your money is growing for the future. This is where working with a fiduciary financial advisor could be valuable.

A fiduciary financial advisor puts your interests first, helping you create a plan that works for you—not just in terms of cash management but also in broader financial strategies. At Northstar Financial Planners, we work with clients as part of an ongoing financial planning process to help them assess how much cash they need and how to optimize the rest of their portfolio.

By balancing liquidity needs with growth potential, you can feel more confident that your financial future is on the right track.

Final Thoughts

While cash may feel like a safe choice, it’s not always the best long-term strategy. Holding too much cash can expose you to inflation risks, missed opportunities, and lower returns. To find the right balance, start with a solid emergency fund, consider your upcoming expenses, and then put your money to work in investments that align with your goals. If you’re unsure of how to manage your cash and investments effectively, a fiduciary financial advisor can help guide you through the process.

Schedule a complimentary consultation with one of our fiduciary, fee-only financial planners to discuss your personal situation.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.