Whoever said “cash is king” obviously didn’t know about the diverse investment options available today. While an emergency fund is a smart financial management idea, holding on to too much cash is not. Over the last year, the uncertainty caused by the global COVID-19 pandemic has seen more people holding on to cash.
Are you holding too much cash? What are the risks of this strategy? How can you remedy the situation? The answers to these questions can mean the difference between building wealth or watching your buying power slip away.
Here are three signs that you have too much cash on hand:
- Uncertain emergency fund: You don’t know how much you need for an emergency fund.
- Excess monthly cash balance: After paying your monthly bills, you have a large sum of money in your checking account, rather than sending that money off to work for you in a savings or investment account.
- You have cash but no investment strategy or related accounts: If you wish to invest, do it now. Talk to your financial institution or advisor and understand the diverse investment options available on the market.
Having money in the bank will give you some comfort, but you can also use some of that cash to deliver higher yields through the right investments. Here are some risks of holding too much cash:
- Inflation: As inflation rates rise every year, the cost of living also surges. Investing can help you outpace inflation.
- Missing out on opportunities: You’ll realize over time that there were multiple investment options that would have outgrown your cash. You might end up investing late in the day when returns are lower.
- Impulse spending: Having cash lying around exposes you to poor financial decisions.
If you have built an emergency savings fund and you still have excess cash in your account, it’s time to create an investment plan. The same is also important if you have a windfall or a liquidity event that has significantly boosted your cash in the bank.
Before you invest, review your monthly expenses, bills, and savings. The best strategy is to have an amount that covers your monthly bills and regular spending. This amount is separate from your emergency fund, which should be an amount that covers three to six months of expenses.
On the savings side, you should have a goal towards which you’re saving – for instance, starting a fund for your child’s college tuition fees. The rest of your cash should go into your investments.
One of the best investment options is a highly liquid investment account. This is an investment tool that grows your money but still gives you quick access to cash. You can quickly and cheaply convert some or all of your holdings into cash.
Consider the money market, mutual funds, stocks, and bonds when choosing highly liquid investments. The best high-liquidity investment account is one that easily converts to cash without excessive fees.
It’s time to re-evaluate your financial plan and increase your investments. Holding too much cash exposes you to financial risks, and you miss opportunities to create wealth.
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