I had just joined a women’s investing group. It was a meeting early on, and one of the co-leaders, who worked with high-net-worth individuals said:

“The biggest mistake I see women make with money is holding too much cash.” 

Mic drop. 

Wow, that’s stuck with me. And, as I’ve been working with more people on their personal finance journey, I can tell you that’s also true for a LOT of women of average means, as well as some men. 

What leads to having too much cash on hand?

• For women it’s often risk aversion.

• Or, lack of confidence and knowledge when it comes to investing. 

• Behavioral finance experts tell us that invested money feels farther away and seemingly not our own. As a result, we avoid putting the cash into something more lucrative because we want to keep our money close. 

How much is too much cash on hand?

Is $8,000 too much? $20,000? $100K?

Well, that’s depends on:

1. Your monthly expenses & short-term needs.

2. Your net worth.

3. The account type (and interest rate or yield) where it sits.

A good rule of 👍 is to keep 3-6 months of living expenses in cash — meaning in a savings account, ideally a high-yield savings account (HYSA).

Money for your short- and medium-term goals, i.e. those less than 3-5 years in the future, you can keep in cash equivalents. These could be bonds, such as Treasury Notes, or CDs (Certificates of Deposit), or, with current interest rates, a high-yield savings account. Not a standard 0.04% savings account at your mega retail bank, please. 

Why is having a lot of cash risky?

Cash is seemingly the safest form of money. FDIC insured in a bank account. Immediately tradable for goods and services. Accepted everywhere.

Those are all true, but they don’t take in account:

1. Losing money to inflation. With inflation at 3.3% right now, and most major retail banks paying only 0.01-0.04% on savings accounts, having money in these accounts means losing buying power. Your safe cash buys you less tomorrow than today.

2. Missing out on compound interest. Cash doesn’t earn much (or anything), so if you’re not getting compound growth on your money by being invested, you may not have enough for retirement or other life goals. And you’re missing out on free money.

3. Changing yields on savings accounts & CDs. If you’re keeping your money in cash equivalents, like bonds, CDs, money markets, or HYSA, when interest rates drop, you could be left with poor yields and have missed out on the upside of the market.

So, what can you do?

1. Calculate your cash needs based on your monthly expenses and any major expenses (goals) you expect in the next 2-3 years. 

2. Open a high-yield savings account and park extra cash there. The goods ones are paying about 5%. With inflation at ~3.3% right now, at least you won’t be losing buying power, but you’re not really gaining anything either.

3. Invest in the stock market or other investments. Year-to-date the US stock market has returned 14.45%, which is a much better way to not only protect your money from inflation, but also to grow it for long-term goals. (This is not a great option if you need the money soon because investing involves risk.)

Still not sure if you have too much cash or what would be best for you?

Let’s connect!

Sign up for a discovery call and let’s look at your situation together.