Could Your Cash Savings Hurt You?

For Millennials and Gen-Xers, having too much in cash may be a good problem ... but it’s a problem nevertheless. Here’s why, how much you should have on hand and some ideas on what you may want to do with the rest.

Studio shot of woman up to her eyes in money
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It's hard to imagine having too much cash. But it's actually possible to do.

If you’re decades away from retirement and you literally have more money than you know what to do with, it probably doesn't matter if it's all sitting in cash somewhere. Most of us, though, have more financial goals than we have money to accomplish them with — so we need to take the money we do have, and grow it over time.

Cash savings is important (especially to retirees), but it's not the answer to growing wealth — which is what Millennials and Gen-Xers really need to focus on. And this is where you can truly have too much sitting in cash savings vehicles, whether that's under your mattress, in a bank account or CD, or even a money market in an investment account.

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There are a few ways sitting on too much cash in these various places can hurt you:

Cash Doesn’t Grow on Its Own

Not only will inflation erode the power of your cash, but by avoiding investments you miss the opportunity to let compound returns build wealth for you. Cash sitting in a bank account — or even most CD or money market accounts — will not grow enough to be useful in helping most people accomplish their goals.

Most of us need to leverage the power of the financial markets to create and grow the kind of wealth we need to build the lives we want.

Cash Isn’t Necessarily Safer Than Investments

Some people want to stockpile cash because it makes them feel safer than risking their money in the market. And they have a point: All investments do come with some degree of risk. Cash is usually considered an entirely safe place to keep money.

In other words, if you stash $100 in a safe at home or at your local bank and keep it there for 30 years, it’s going to be worth significantly less tomorrow than it is today: Your $100 will likely only buy you $41 worth of goods in 30 years (assuming a 3% inflation rate). Compare that to what happens if you invest $100 for 30 years assuming a 7% return: You’ll have $761 at the end of those decades. Adjusted for inflation, you’ll likely be able to buy $314 worth of goods.

Sitting on cash could turn $100 into $41. Investing $100 without even contributing more to that initial contribution over time could leave you with $314. Which option seems “risky” now?

You Can Be Tempted to Time the Market (and That’s Not Going to End Well)

Many people sit on cash even in their investment accounts because making the decision to jump into the market is emotionally overwhelming. And that’s only natural: You may not want to dump a bunch of cash into stocks and bonds all at once.

But the thing is, if you have that fear right now … you will likely always have that fear, no matter what the market does on a particular day. I’ve watched clients sit on the majority of their wealth for years. Every time I explain the dangers of keeping so much cash, they say, “Well, the market can’t possibly keep doing [whatever it’s doing at the time]. I want to wait until [whatever current event the news is saying is impacting markets at the time] blows over.”

So they wait. The market keeps creeping up, and the drop they were sure was about to happen doesn’t come. Then we have the same conversation six months or a year later, with the same results. Of course, the market will drop at some point. But in the meantime, you’re missing out on the growth happening right now. There will always be something you can fill in those blanks with, no matter what day, month or year it is.

The solution? Use an investment strategy based on evidence, research and reasonable assumptions on what we know of efficient financial markets. And then realize that yes, the market will go down at some point, and that’s OK as long as you’re invested for the long term and stay invested to ride out that volatility when it occurs.

Here's How Much Money Workers Should Keep in Cash

At a bare minimum, you need enough cash on hand to cover your regular, normal and expected expenses. For most of us in our working careers, that cash comes from our incomes and paychecks.

Beyond that, you also need cash set aside for unexpected expenses. You can do this in two ways:

  1. Keep a cash cushion in your checking account. My wife and I keep a few thousand dollars in our checking account as a “buffer” that guards against overspending and other small financial mistakes (like occasional expenses that we should have budgeted for, but forgot, or things like late fees). We act like this buffer is our “$0 balance.” Whenever we eat into it, we immediately replenish it the following month by cutting down on discretionary expenses like meals out or entertainment.
  2. Build an emergency fund. Our cash buffer in our checking account protects against small issues and budgeting mistakes — but our emergency fund serves as a backup cash reserve if something seriously unexpected or out of our control comes up. We dipped into this when we took our cat to the emergency vet a few years ago and racked up a $4,000 bill. This fund is for true emergencies, and just not cash we can dip into when we want to buy something or take a trip “just because.” (We save up for those things instead.)

How much of a cash buffer you keep in your checking account is a little arbitrary, but you probably don’t need more than a few thousand dollars. If you keep more than $5,000 as a buffer, you’re better off putting some of that cash into a money market or an investment account so it can get to work earning a return on your behalf.

Emergency funds, on the other hand, come with more defined guidelines on “how much.” At a minimum, aim to save three to six months’ worth of income in your emergency fund. If you experience more income volatility or have lots of financial responsibilities and obligations (or are simply more risk-averse), you can consider saving six to 12 months’ worth of income for emergencies. Anything over that, again, would serve you better in a place where it can contribute to your efforts to create wealth.

Once you put these two cash reserves in place, you’ll also want to consider your short-term and midterm goals. Short-term goals are things you want to accomplish within the next few years; midterm goals might be five to 10 years down the road.

Money you need to achieve your short-term goals needs to be kept fairly liquid, or in a place with little to no risk that you can easily access at any time. Something like a regular savings account and potentially a money market account could work well. Midterm goals are a little more complicated; depending on the specific goal, you might want to keep this money in cash as well. Anything you need money for in five years or less probably needs to be in cash. Anything with a longer time horizon might be better off invested in the market.

What Workers Can Do with the Rest of Their Wealth

Once you set aside an appropriate amount of cash for emergencies, reserves and shorter-term goals, consider investing the rest if your goal is to grow wealth. Depending on your specific situation and financial goals, "investing" could mean a lot of different things.

Some options include:

  • Maxing out your 401(k) or other retirement accounts (like a Roth IRA, SEP IRA, etc.). Just make sure that these accounts are properly allocated and diversified according to your goals and risk tolerance. Remember, you can still hold too much cash within investment accounts. You want to invest aggressively enough to give your money a chance to earn a return in the market, but not so aggressively that you can't handle the volatility that comes with increased risk — or that you take unnecessary risks.
  • Looking at investments outside the stock market. You may want to start a business, purchase a multifamily property to rent or explore alternative ways to invest and grow your money — and whether that’s an appropriate move for you depends on your specific situation, needs and goals.
  • Contributing to a taxable brokerage account. This is what my wife and I do right now. We both max out our SEP IRAs and our HSAs. We allocate $1,250 per month into a cash savings account because we anticipate needing to buy a car in the next few years, and want to have cash on hand for that specific goal. Then, we contribute the rest of the cash we want to allocate to "savings" to our brokerage account.

That last point is especially important to think about if one of your goals is something like “financial freedom” or early retirement. Maxing out accounts like 401(k)s or SEPs is an important priority — but with a few exceptions, it’s not easy to access this money before your official retirement age. And if you want the option to quit working and live off your accumulated assets at age 50, then you need to keep a percentage of those assets in non-retirement accounts.

The Bottom Line on Cash

No matter what your specific vision of the future entails, it’s usually good practice to diversify not just your investment portfolio but also the accounts in which you invest — and to hold more assets than just a lot of cash.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser
Founder, Beyond Your Hammock

Eric Roberge, CFP®, is the founder of Beyond Your Hammock, a financial planning firm working in Boston, Massachusetts and virtually across the country. BYH specializes in helping professionals in their 30s and 40s use their money as a tool to enjoy life today while planning responsibly for tomorrow.

Eric has been named one of Investopedia's Top 100 most influential financial advisers since 2017 and is a member of Investment News' 40 Under 40 class of 2016 and Think Advisor's Luminaries class of 2021.