Accumulating a large sum of cash in your bank account can be a good feeling and it might bring you a sense of security and safety. Building up your savings accounts knowing that the cash is sitting there risk-free and easily accessible can give you a sense of comfort. However, this isn’t always the smartest option when it comes to your finances. Sitting on too much cash in a savings account can often hinder your ability to build wealth for retirement and other long range financial goals. In addition, you could actually be losing money due to inflation instead of growing your assets, and here’s why.
At Sherman Wealth, we often talk about diversifying your portfolio and the importance of long-term market investment in order to increase and grow your money over time. In a recent survey by Personal Capital and Kiplinger Personal Finance within retirees and soon-to-be retirees portfolios, 26% was made up of cash, which tends to be on the conservative side of diversifying and investing. It’s okay to be nervous about market volatility and the natural ups and downs in the stock market; however, holding on to too much cash can actually hurt you in the long run. It’s crucial that you find an equilibrium point between your cash and investments that works with your financial situation and risk comfortability.
So how do you know if you are sitting on too much cash? As mentioned in our previous blogs, you should always have an emergency fund that typically has enough liquid cash to sustain your monthly bills for about 3-6 months. If you have any upcoming large purchases, you should have a separate bucket of funds available to pay for those goals as well. When planning your budget, think about your wants versus your needs, while also taking your cash flow into consideration. Once you have fulfilled these liquid cash buckets, you should then determine your risk tolerance and think about allocating your dollars towards diversified investments that will gain long term returns, such as equities, fixed income and real estate.
We know choosing the right investments and asset allocation for you can be overwhelming, which is why there are professionals to help in this process. So, if you have questions for us or would like to use our risk tolerance software to help determine where your investment risk comfortability stands, email us at email@example.com or schedule a complimentary 30-minute consultation here.