It happens. You open your bank statement and realize that over the past couple of years your bank account has crept up to $50,000, $100,000 or even $200,000. It feels good to open that statement and see that cash sitting there. It means that you won’t have to worry about paying your bills. You are covered. Unfortunately, you may be hurting yourself in the long run.
I get it. It feels emotionally good to keep it as it is. However, you may be losing pace to inflation, paying others higher interest rates than you are receiving from the bank, or not investing as efficiently as possible in your future.
Each and every year, we are able to purchase less today with the same amount of money as compared to a year ago. Inflation has been very low for the last ten years, but there is no guarantee that will continue. So, if it costs $1.05 to purchase a soda today and that same soda was only $1.00 last year, you’ve lost purchasing power. (Unless you earned 5% on the bank account).
Another mistake I see clients making when it comes to holding onto cash is not paying down debt with it. If you have a loan at 4% and you are receiving 1% interest on your savings account, you are actually losing ground every month. It is better to pay off the 4% debt than to hold the cash in the bank. The disclaimer here is to make sure that you are keeping an appropriate cash reserve before making this move. I recommend that my clients hold between three and six months’ worth of their expenses in a cash reserve. Anything in excess of that, they should consider paying down debt or repositioning.
Are you investing efficiently in your future if you are keeping too much in cash? Consider the potential tax savings for the future if you invested in an IRA instead of leaving the cash in the bank. Could you invest in a 529 plan for your kid’s college education? What are the opportunity costs of not investing in tax efficient vehicles for your future? I have several clients that I began working with in this last year who had cash reserves north of $100,000 but who were not maxing out their pre-tax retirement savings through their employer. I had them change their contributions through their paychecks and then move cash out of savings into their checking accounts every two weeks to make up the difference in cash flow.
In conclusion, figure out what your cash reserve should be and reposition the rest to your advantage. Your future will thank you. Not sure where to start? We’d love to help.