Did you know that holding too much cash is actually a bad thing? That’s right: Just as there’s such a thing as not having enough cash, there’s definitely such a thing as having too much cash.
Why too much cash is actually a bad thing
Cash may seem liquid and safe, but if you have too much cash and the cash you do have isn’t in the right vehicles, your cash isn’t safe.
When your excess cash isn’t in the right vehicles, you’re actually losing money because the purchasing power of your cash declines with inflation. For instance, you only earn about 1% on your cash in a generic savings account in Malaysia. However, Malaysia’s inflation rate for the last 10 years averaged 2.1%, which means your cash is actually losing 1.1% every year. The longer you have excessive cash just sitting in a low-yielding savings account, the more money you’re losing to inflation.
Assumptions - Nominal returns (before deducting for inflation): Savings account: 1%, StashAway Simple™: 2.4%, and Invested: 6%. And Malaysia's average inflation rate: 2.1%
As with any asset, cash should be managed wisely and intentionally. Since idle cash in your savings account doesn’t keep up with inflation, you should put cash in instruments that allow your cash to either maintain or grow its value.
How much cash you should have
Because cash loses its value over time, you need to evaluate exactly how much cash you should have in your savings account and where you should keep cash reserved for your emergency funds and your short-term goals.
Every unit of cash in your savings account should serve a specific purpose. Ideally, your savings account should have just enough money to cover your monthly expenses. This minimises the amount of cash exposed to the teeth of inflation.
For your emergency fund and short-term goals, keep your money in a low-risk, liquid, interest-earning vehicle that allows your entire balance to keep up with inflation. You can choose to keep the funds for these goals in a high-yield savings account, money market fund, or other cash management vehicles that don’t lock up your funds.
Being risk-averse isn’t an excuse for having too much cash
If you’re risk-averse, you’re probably afraid of losing money. Sure, your cash doesn’t have a huge downside (and this makes it inherently low-risk), but having too much cash does mean you’re unnecessarily writing a death sentence for that portion of your cash.
Just because you don’t see the absolute value of the cash decreasing in your account, the real value of your money is declining— savings accounts don’t show the change in your purchasing power the way investment accounts show your returns. So you’re not going to see that you’re actually losing money. It’s like being in an investment that has an invisible ever-worsening negative return.
For your long-term goals, your money should be invested in vehicles that can generate a better return than a savings account or a fixed deposit. If you consider yourself risk-averse, there are low-risk, medium-to-long-term investment portfolios that you can put those savings into.
Though cash itself isn’t an investment, it’s still an asset that you must manage intelligently as part of your financial plan.
Whether you’re holding cash for your emergency fund, investing in your short-term goals or even planning to invest your cash into the markets over time, you can keep your cash in a cash management portfolio such as StashAway Simple™. StashAway Simple™ allows you to grow your cash without the hassle of locking up your funds, investment requirements, credit cards, tiered earning structures, and whatever conditions that make it painful to manage your cash. Head on over to StashAway’s website to find out more today.
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