The Cons of Keeping a Large Amount of Idle Cash
Idle cash refers to funds that are not currently being used for any specific purpose, such as investments, expenses, or paying down debt. This can include cash in savings accounts, checking accounts, or physical cash on hand.
Managing idle cash is an important aspect of personal finance and business management. Having too much idle cash can lead to missed investment opportunities and potential financial losses, while having too little can lead to financial instability and difficulty in meeting expenses. Finding the right balance of cash management is crucial for achieving financial goals and stability.
The risks of keeping too much idle cash
One of the biggest risks of keeping too much idle cash is the potential loss of purchasing power due to inflation. Inflation is the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. When cash is held in an account, it earns a minimal interest rate, while the inflation rate is much higher, which causes the value of cash to decline over time.
Loss of potential investment opportunities
When cash is kept idle, it is not being put to work to earn a return. This can lead to missed opportunities for investment in stocks, real estate, or other assets that have the potential to earn a higher return. This is particularly true in times of economic growth, where investments in stocks and real estate can generate high returns.
Opportunity cost refers to the potential benefits that are given up when one choice is made over another. When cash is kept idle, the opportunity cost is the potential returns that could have been earned from investing that money. For example, if $10,000 is kept in a savings account earning a 1% interest rate, the opportunity cost is the potential returns that could have been earned from investing that money in stocks or real estate.
Lack of liquidity
Keeping too much idle cash can also lead to a lack of liquidity, which refers to the ease with which assets can be converted into cash. Having too much cash tied up in idle accounts can make it difficult to access funds in case of an emergency or unexpected expense.
How to avoid keeping too much idle cash
Regularly review and assess cash needs
One of the best ways to avoid keeping too much idle cash is to regularly review and assess cash needs. This can involve looking at current and projected expenses, as well as any upcoming big-ticket items that need to be purchased. By understanding cash needs, it becomes easier to determine how much cash should be kept on hand and how much can be invested.
Invest in low-risk, high-yield options
Another way to avoid keeping too much idle cash is to invest in low-risk, high-yield options such as Treasury Bonds, Certificates of Deposit (CDs), and other fixed-income securities. These options provide a relatively stable return, while also protecting against inflation.
This is an important aspect of cash management. Instead of keeping all cash in one account, spreading the funds across different types of accounts can help to minimize risk and maximize returns. For example, keeping some cash in a savings account for emergencies, some in a CD for a higher return, and some in a money market fund for liquidity.
Seek professional advice
Seeking professional advice can also be helpful in managing cash. A financial advisor or planner can provide personalized advice on cash management and investment options based on individual financial goals and circumstances.
Keeping too much idle cash can lead to missed investment opportunities, inflation, opportunity cost and lack of liquidity. Regularly reviewing and assessing cash needs, investing in low-risk, high-yield options, diversifying investments and seeking professional advice are ways to avoid keeping too much idle cash.
It is important for individuals to regularly review and assess their own cash holdings and consider the potential risks and missed opportunities of keeping too much idle cash. By taking steps to manage cash effectively, individuals can work towards achieving their financial goals and maintaining financial stability. If you have questions on how to manage your cash, please seek professional advice and review your options.