Is Too Much Cash a Bad Thing? An Analysis of the Pros and Cons

It’s easy to assume there’s no problem with having a lot of cash on hand. After all, you do need to have cash on hand in many situations. Whether it's for paying bills, saving for goals, or simply having some extra spending money, cash is an essential part of our daily lives.

But is there such a thing as having too much cash? There can be. 

In this article, we'll take a closer look at the concept of "too much cash" and examine the pros and cons associated with holding excess funds.

Btw… when we say “cash”, we mean the money you have in checking, savings or money market accounts. 

Understanding the Concept of “Too Much Cash”

Before we dive into the pros and cons, let's first define what we mean by "too much cash.”

Essentially, this refers to a situation where an individual or business has more money on hand than they need for their immediate needs or planned expenses.

While having some extra cash can provide a sense of security and freedom, holding too much can lead to missed opportunities and other potential drawbacks

How Much Cash is Too Much Cash?

The answer to this question will vary depending on a number of different factors, including an individual's income, expenses, and financial goals.

Here’s an example for how we might determine this number for a Triune client:

Basic Situation 

• The client’s short-term needs include their emergency fund, travel, and a minor home improvement. 

• The client spends ~$7,500/mo on their lifestyle, plans to spend $10,000 on a home improvement project, and wants $5,000 for their travel this year.

Determining the Right Amount of Cash

• $22,500 – Emergency Fund (this client is comfortable with three months’ lifestyle costs)

• $10,000 – Home Improvement 

• $5,000 – Travel 

Total Cash Needed = $37,500

If the client has cash above $37,500, then it should likely be put to better use (like paying down high interest debt or investing)

The Role of Cash in Personal Finance and Business

Cash is, of course, a tool that we use to purchase goods and services. However, it also provides a sense of security and flexibility.

Cash reserves can be used to weather unexpected financial setbacks or plan ahead for major expenses or goals. For businesses, cash is an important component of day-to-day operations, helping to fund growth and handle unforeseen expenses.

However, holding onto excess cash can have some downsides.

For example, if that cash is simply sitting in a low-interest savings account, it may not be earning as much as it could be. We see a Financial Life Plan in “time horizons”, and if the time horizon for your goal is within two years, then keeping it in savings (ideally a high interest account) is wise. But if you have cash you don’t really need for more than 2 years, then paying down debt more aggressively or investing the money is likely a smart move. 

So while having some extra cash on hand can provide a sense of security and flexibility, holding onto too much can have potential drawbacks. Be sure to consider factors like interest rates, investment opportunities, and personal financial goals in order to determine the appropriate amount of cash to hold onto. And of course, you should always speak to your financial advisor about how much cash you need available for your lifestyle.

The Pros of Having Excess Cash

While holding too much cash can be ill-advised depending on your financial goals, there are certainly some benefits to having a solid reserve of funds on hand. Below, we’re sharing a few advantages to consider.

Financial Security and Emergency Funds

Perhaps the most obvious advantage of having excess cash is the sense of security it provides. By having a buffer of funds available, individuals and businesses alike can weather unexpected financial challenges without having to resort to taking on debt or selling off assets.

An emergency fund can cover expenses like medical bills, car repairs, or job loss without disrupting long-term financial plans or causing undue stress. In addition, having excess cash can provide peace of mind and reduce anxiety around financial uncertainty. 

Flexibility in Decision Making

Cash reserves can provide a degree of flexibility when it comes to making financial decisions.

For individuals, this could mean being able to take time off from work without worrying about paying the bills, or having the funds to pursue a new hobby or interest. For businesses, a cash reserve could allow for more experimentation and risk-taking with new products or ventures.

Having excess cash can also provide the freedom to make choices that align with one's values and priorities. For example, an individual may choose to take a lower-paying job that offers more fulfillment, or a business may choose to invest in sustainable practices that align with their mission.

Increased Bargaining Power

Whether it's negotiating a lower price on a large purchase or securing better loan terms, having a strong cash position can make it easier to achieve desired outcomes.

It can also provide cushion in negotiations and reduce the pressure to accept unfavorable terms. This can lead to better outcomes and more favorable agreements over the long term.

The Cons of Holding Too Much Cash

Now that we’ve reviewed possible benefits to having excess cash on hand, there are also some drawbacks to consider. Below, we’re sharing a few potential downsides. 

Inflation and Loss of Purchasing Power

One of the biggest risks associated with holding excess cash is the potential for inflation to erode its value over time. As prices rise, the purchasing power of cash can decrease, meaning that holding onto too much cash can actually result in a net loss over the long term.

For example, if an individual holds onto $10,000 in cash for 10 years, and inflation averages 2% per year during that time, the purchasing power of that $10,000 will have decreased to approximately $8,166. This means that even though the individual still has $10,000 in cash, they can only buy goods and services that are worth $8,166 in today's dollars.

Opportunity Cost of Uninvested Cash

While some level of cash reserves can be advantageous, holding onto too much can mean missing out on potentially higher returns available through investing in stocks, mutual funds, or other assets.

For example, if an individual holds onto $50,000 in cash instead of investing it in a diversified portfolio of stocks and/or bonds, they may miss out on potential returns of 7-10% per year, depending on market conditions. Over a 10-year period, this could mean missing out on hundreds of thousands of dollars in potential investment gains.

Potential Mismanagement and Overspending

Finally, holding onto excess cash can potentially lead to poor financial decisions or overspending. Without a plan in place for how to allocate funds, individuals or businesses may be more prone to impulse purchases or other financial missteps.

For example, if an individual receives a large windfall of cash and decides to keep it all in cash without a plan for how to use it, they may be more likely to overspend or make poor financial decisions. Similarly, if a business has excess cash on hand and doesn't have a clear plan for how to allocate it, they may be more likely to make unnecessary purchases or investments that don't align with their long-term goals.

While holding onto excess cash can provide a sense of security and stability, it's important to consider the potential downsides and risks associated with doing so. By carefully evaluating your financial goals and needs, and developing a clear plan for how to allocate your assets, you can make more informed decisions about how much cash to hold onto and how to invest the rest.

Striking the Right Balance

So how can individuals and businesses determine the right amount of cash to hold?

It ultimately comes down to assessing financial goals and needs, along with considering the aforementioned pros and cons. Your financial advisor can help you think through what the best course of action is based on your unique situation and goals.

Below are a few strategies to keep in mind.

Assessing Your Financial Goals

The first step in finding the right balance of cash reserves is to assess personal or business financial goals. Individuals and businesses should consider what short-term and long-term financial needs they have, as well as what objectives they hope to achieve with their funds.

Diversifying Your Assets

One strategy for managing cash holdings is to diversify assets across different types of investments.

For individuals, this could mean investing in stocks, bonds, or real estate alongside cash reserves. For businesses, diversification could involve investing in new products or services, or exploring alternative revenue streams to supplement cash holdings.

Regularly Reviewing Your Cash Position

Finally, it's important for individuals and businesses alike to regularly review cash holdings and assess whether they're maintaining the right balance.

This could involve setting up regular financial planning meetings, or working with a financial advisor to establish a long-term strategy for managing assets and cash reserves.

Conclusion

There's no one right answer to the question of whether holding too much cash is a bad thing. For some individuals and businesses, larger cash reserves may provide a sense of security and flexibility that aligns well with their financial goals. For others, maintaining a smaller cash position in favor of other investments or assets may prove more beneficial.

That’s why we go through the complete Financial Life Planning process with each of our clients. We learn about their unique circumstances, desires, and challenges to help decide what is best for them.

ABOUT TRIUNE FINANCIAL PARTNERS

Triune Financial Partners is committed to empowering people with life-changing financial counsel. Triune is an independent firm that values clarity, simplicity, and transparency. We're a fiduciary, which means we always put our clients' interests first. In addition to Financial Life Planning for individuals and families, we also serve 100+ businesses, churches and nonprofits to craft powerful 401(k) and 403(b) plans for their organizations. Whether you're working with one of our Financial Life Planners or setting up a 401(k) plan for your organization, Triune is here to help you thrive financially.

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