Contrary to popular trends, cash is an intelligent asset
To many, keeping too much cash is like burning your money since inflation constantly rises.
However, holding a specified amount of cash is a prudent way to hedge your invested money.
Cash can’t lose more than 3–4% per year or the average annual inflation rate.
Your invested money, on the other hand, could lose double digits.
If you can’t stomach (or afford) the losses, higher cash reserves might be for you.
According to Smart Asset:
“Studies indicate that millionaires may have, on average, as much as 25% of their money in cash.”
Not to say you should live like a millionaire, but many of their financial habits are beneficial.
Instead of sitting your money in a traditional savings or checking account, other options could include:
- CDs
- Money Markets
- High Interest Yielding Savings Accounts
- Low Risk/High Liquidity Investment Accounts
The theme for these types of accounts is they are:
- Low risk
- High liquidity
- Earn a modest rate of return
The Emergency Fund
Your emergency fund is a perfect example of funds you’d want to keep in these accounts.
In an emergency, you’ll need money quickly (high liquidity), usually in a money market or high interest-yielding savings account.
You don’t want all of your money to be tied up in low-liquidity investments during times of need.
If you’re nearing retirement age or desire to invest or save less aggressively, having a percentage of your net worth in cash reserves will help offset the risk of your other less liquid investments.
