Can You Hold Too Much Cash? Know the Pros and Cons (2024)

FAQs

Can You Hold Too Much Cash? Know the Pros and Cons? ›

Another advantage of holding a meaningful cash position is that additional liquidity gives you more flexibility to take advantage of new investment opportunities should they arise. The number one drawback of having too much cash is that you may be sacrificing the return potential of investments in stocks and bonds.

Lower returns: Since cash is largely a risk-free asset, investors don't get the “risk premium” that other investments, like mutual funds or GICs, may come with. Inflation risk: While cash has no capital risk, inflation can erode its purchasing power – meaning you wouldn't be able to buy as much with it in the future.

“More than two months' worth of living expenses in a savings account is too much given the ability to earn around 5% from easily accessible money market accounts that should not fluctuate in price.”

Excess cash has 3 negative impacts:

It lowers your return on assets. It increases your cost of capital. It increases overall risk by destroying business value and can create an overly confident management team.

Experts generally recommend having enough cash to cover 3–6 months of living expenses in an easily accessible account, such as a high-yield savings account. This safety net can act as a buffer against unexpected expenses like job loss, medical bills or car repairs.

But there's a reason you don't just keep bills in a safe: inflation, which gradually erodes the spending power of your dollar. That's why it's generally advisable to park your cash in a vehicle that maintains liquidity and safety, but also gives you a chance to keep up with inflation.

In the United States , there is no law that prohibits individuals from storing large amounts of cash at home . However , it is important to note that there are potential risks associated with keeping large sums of money at home . These risks include theft , fire , and natural disasters .

While there is low risk of currency oversupply and accelerated inflation when hoarding money, financial hoarding may distort the value of assets and commodities and intensify the risk of losing money in investments or business ventures, as less money circulates through active economic instruments such listed companies.

What you need for everyday living expenses. Your emergency fund. The exact amount you need will depend on your financial situation, but we typically recommend aiming for three to six months' worth of take-home pay (or up to nine months' worth, if you're self-employed).

In addition to keeping funds in a bank account, you should also keep between $100 and $300 cash in your wallet and about $1,000 in a safe at home for unexpected expenses. Everything starts with your budget. If you don't budget correctly, you don't know how much you need to keep in your bank account.

Can you get in trouble for having too much cash? ›

Carrying large amounts of cash is not an illegal act in and of itself. Despite the popular misconception, under U.S. law, there is no legal penalty for holding any sum of cash in any U.S. jurisdiction.

Key takeaways. Reasons people keep cash at home include emergency preparedness, financial privacy concerns and mistrust of banks. It's a good idea to keep enough cash at home to cover two months' worth of basic necessities, some experts recommend.

If you make $5,000 a month, then the right amount of money to keep in savings for emergencies would be anywhere from $15,000 to $30,000 if you follow the three to six-month rule.

Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolio. Cash equivalents, financial instruments that are almost as liquid as cash.

Inflation risk

The primary allure of cash is safety. While you won't lose dollars holding cash, you can lose significant spending power. This chart shows the destructive impact of inflation on $1 put under the proverbial mattress in 1982.

Surplus cash can have three negative consequences:

It can reduce your return on assets. Surplus cash that isn't needed for business operations is unproductive. This cash could instead be invested in income-generating projects. It can elevate your cost of capital.

It can cause you to make bad decisions: Having a lot of money can also cause you to make bad decisions. For example, if you're desperate for cash, you might take on a job that's unethical or immoral—even if it pays well.

That said, there are some good reasons not to keep too much money in cash: Inflation decreases the value of any money you hold in cash. Inflation, aka rising prices over time, reduces your purchasing power.

It's Not Secure

The simplest reason for not bringing large amounts of cash to the U.S. is that it can be lost or stolen — and once it's gone, it's gone. If your debit or credit card goes missing, you have protection from your financial institution.