Cash is king, right?
Well, not always. Sometimes you can have so much cash sitting around in your bank account that it turns into a wealth-devouring demon.
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On average, American families had about $62,410 in their chequing accounts, according to the Federal Reserve’s 2022 Survey of Consumer Finances. For most people, that balance is simply too high.
Here’s why keeping too much cash on hand could be a serious mistake and a significant drag on your financial health.
The inflation tax
Many chequing accounts offered by Canadian banks earn no interest at all, according to an analysis from Forbes (1) . That means your money isn’t keeping up with the rate of inflation.
In September, the inflation rate hit 2.4%, according to Statistics Canada (2). At that rate, your money is likely to lose half its purchasing power in just over 29 years.
But inflation isn’t the only problem. Idle cash also carries opportunity cost — the money you leave on the table when you don’t invest in assets that can generate income or growth.
Read more: Are you drowning in debt? Here are 3 simple strategies to help crush your balance to $0 in no time
What to do with cash instead
To fight inflation, consider moving some of your money into short- or medium-term securities with higher yields.
For example, the Manulife Money Market Fund F has a distribution yield of 3.71% with a low risk assessment (3). Another low risk is the BMO Money Market Fund which offers a monthly distribution frequency and a yield of 2.60%.
To be fair, past performance doesn’t guarantee future returns, but the point stands: Keeping cash idle means missing out on growth.
Investing your cash in a diversified portfolio generally beats letting it sit in a chequing account. But that doesn’t mean you should drain your balance completely. There’s still a healthy amount of cash you’ll want to keep on hand.
How much cash should you keep?
Cash remains your best source of emergency funding. If you suddenly lose your job, face an unexpected medical bill or need a quick repair on your car, you’ll want fast access to some funds.
Most financial advisors suggest keeping an emergency fund worth three to six months of essential living expenses. To find your target, total up what you spend on necessities in an average month, then multiply by three or six.
Another approach is to multiply your after-tax monthly income to build a short-term buffer if you lose your job.
As with most money matters, cash management is a balancing act. Too much cash will drag your finances down and limit your ability to generate wealth, but too little can leave you vulnerable when life throws you a curveball.
Find the right balance that keeps you — and your family — both secure and growing.
- With files from Rebecca Holland*
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Forbes (1); CBC (2); Spring Financial (3)
This article originally appeared on Money.ca under the title: Over this amount in the bank? You’re in trouble — here’s why
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.