When it comes to your finances, it turns out that the old adage rings true – it is, in fact, possible to have too much of a good thing. Despite always hearing how cash is king, there are definitely mutinous aspects to the throne that every investor should be aware of.
As beneficial as cash can be to everyone, from the average worker to the richest of the rich, cash certainly has its drawbacks as well. In other words, just like most financial concepts, determining how much cash to hold within your overall portfolio is completely dependent on your specific needs and personality but needs to be addressed.
Too Much Liquidity
There will always be something to be said for having sufficient savings to properly handle not only your bills but life’s financial curveballs as well. Although there are a few generic guidelines to abide by – including two months of salary in savings or setting aside 10% of every paycheck – the proper amount of cash to keep in a readily available account is entirely dependent on your own personality and belief system.
That said, there’s a fine line between maintaining sufficient cash and having too much liquidity. When determining what your preferred level of savings is – including cash accounts in your local financial institution as well as money markets in your investment accounts – always remember that cash simply does not grow on its own.
Therefore, anything you hold in cash will be reduced by inflation over the longer-term. As foreboding as that might sound, however, it’s also important to remember that cash isn’t intended to grow in the first place – that’s what your investments are for. Consequently, the goal of your cash holdings is to provide liquidity for both the known and unknown.
Out of Sight, Out of Mind
While this concept isn’t applicable to everyone, it’s still a point of concern when holding excessive cash. Many people are simply too tempted to rack up charges on their credit cards due to their convenience and proximity, a similar same argument can be applied to excess cash.
For those that might lack the financial self-control of others, accumulating too much cash – particularly in highly liquid accounts like checking – makes it far too easy to spend money that doesn’t necessarily need to be spent. In these particular circumstances, finding a balance between just enough and too much is critical. In short, maintaining sufficient cash to pay the bills, enjoy a night out on the town, or vacation every so often, and address unforeseen expenses like car repairs, but nothing significantly above that is probably a sound approach to adopt.