Of course, we all want a healthy bank account. Having a good amount of dollars within easy grasp is helpful in the case of emergencies or for medium-sized purchases where you don’t want to have to liquidate assets.
But is it counterproductive to have too much cash on hand? Let’s explore that idea and weigh some of the advantages and disadvantages building a portfolio heavy on cash.
Advantages of having a lot of cash:
Financial security: One of the most obvious benefits of having a lot of cash is financial security. You can use your money to pay for emergencies, invest in your future, and support yourself and your loved ones through difficult times. If you’re unsure how much money you need to have set aside for an emergency fund, work with your financial advisor to determine what covers your needs the best.
Opportunities for investment: By having a lot of cash, you could give yourself the opportunity to invest in a variety of assets, including stocks, bonds, real estate, and more. Maybe you’ve heard the term ‘dry powder’ before. When markets are down, having that cash available could pay big dividends over time.
Peace of Mind: Maybe the biggest benefit of all is having peace of mind. People react differently to risk and if you can’t stand to see your account balance go up and down, having a little more cash might be a good idea. Ultimately, this peace of mind can be incredibly valuable, especially in uncertain economic conditions.
Disadvantages of having a lot of cash:
Temptation to spend: With a lot of money, it can be tempting to spend it on unnecessary things or engage in impulsive purchases. This type of spending can quickly erode your wealth and leave you with little to show for it.
Decreased Buying Power: We’ve been fortunate to experience a low inflation environment for much of the past decade, but no one can ignore retirement’s silent killer when rates are rising. By having too much cash in your account, your retirement is susceptible to losing buying power over time. With retirement plans being built for decades rather than years, the money you have today won’t take you as far in 20 or 30 years if you aren’t factoring in inflation.
Lower Potential Returns: The interest rates in savings accounts aren’t what they were 15 or 20 years ago. In fact, the returns are almost negligible in many cases. Even if you don’t feel comfortable putting your money in the market, there are other conservative investment options that can still provide better returns with lower risk.
As you can see, having cash is absolutely necessary but too much cash could limit your ability to reach your retirement goals. In conclusion, having a lot of cash can be both a blessing and a curse. While it offers financial security, investment opportunities, and the freedom to make choices, it can also bring temptation, inflation risk, and lower returns.
To ensure that you make the most of your wealth, it is important to develop a solid financial plan, engage in responsible spending and investing, and have purpose for every dollar in your portfolio.