Americans Have an Average of Nearly $60,000 in Cash. Here's Why That May Be a Bad Thing
- It's important to have money in cash for emergencies.
- Too high a cash balance could mean denying yourself a chance to grow your money.
- If your emergency fund is good to go, consider opening a brokerage account to invest your excess cash.
Having assets in cash is good -- but only to a point.
There's a reason people are advised to keep anywhere from three to six months' worth of living expenses in a savings account. You never know when a financial emergency might strike. And without cash reserves, you risk falling behind on bills and/or having to rack up debt just to do simple things like put food on the table and keep the lights on.
But believe it or not, there is such a thing as having too much money in cash. And if you go that route, you could end up denying yourself a chance to grow more wealth over time.
Americans' cash balances are surprisingly high
Personal Capital surveyed its users recently and found that overall, Americans had $59,506.81 in cash. Not surprisingly, older Americans tended to have more cash than younger ones. The median cash balance among 30-somethings, for example, was $50,974.75, while the median cash balance among those in their 60s was $119,289.96.
Of course, at first glance, these figures seem like positive ones. But some people may have too much cash for their own good.
Personal Capital found that 50-somethings had a median cash balance of $96,726.06. Meanwhile, the Ascent researched average monthly expenses among U.S. households and found that that number came to $5,111. But for someone who spends a little over $5,000 a month on living expenses, $96,726.06 is actually a lot of money to have on hand for emergencies.
Even if you're looking to get aggressive with your emergency fund and save enough cash to cover a full year of bills (which, incidentally, some experts do now recommend in the wake of the pandemic), if you spend $5,000 a month, you don't need close to $97,000 in cash.
The problem with too much cash
You may be wondering why erring on the side of overfunding your emergency savings is problematic. And the reason is that it could cause you to lose out on growth.
These days, savings accounts are finally paying more generously after years of stingy interest rates. But even so, 2% annual interest is a good rate for a savings account today.
If you were to invest some money in a brokerage account, you might manage to generate a yearly return of 5% or 6% -- and that's with a fairly conservative portfolio (meaning, a portfolio heavily filled with investments that aren't considered so risky, like bonds). And with a stock-heavy portfolio, you might easily generate yearly returns of 8% or more.
The point, therefore, is that while it's a great thing to have a fully loaded emergency fund, if you have enough cash to cover 12 months of bills, there's really no reason not to invest your excess cash. And if you're in a dual-income household, you may be okay to fund your emergency savings at a lower threshold -- say, six months' worth of bills.
Investing money does mean taking some risk that you won't have to deal with in a savings account. But it also means opening the door to rewards that could potentially be huge.
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