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Cash may seem like a safe parking space for your money. But holding too much can hurt savers over the long term — especially if it comes at the expense of owning stocks, the growth engine of a portfolio.
“Cash can feel safe, but it doesn’t grow your wealth,” Gargi Chaudhuri, chief investment and portfolio strategist, Americas, at BlackRock, an asset manager, wrote this month in an investment commentary.
Why?
While cash is insulated from the whipsawing nature of stocks, it’s at risk due to a more insidious threat: inflation.
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For example, $10,000 in cash stuffed under the mattress 30 years ago — and earning zero interest — would be worth about $4,700 today after accounting for inflation, according to a BlackRock analysis. That’s a loss of roughly 53%, it found.
In other words, that pile of money can buy about half of what it could three decades ago.
Meanwhile, $10,000 invested in the S&P 500 U.S. stock index would be worth about $92,600, a return of about 826%, according to BlackRock.
Inflation touched its highest level in about 40 years in 2022. While it has fallen considerably since then, inflation remains above the Federal Reserve’s long-term target around 2%.
“Having too much excess cash is not the best thing,” said Uziel Gomez, a certified financial planner and the founder of Primeros Financial in Los Angeles. “If you keep everything in cash, you’re essentially losing money year to year.”
He uses the example of a cup of coffee to demonstrate the point to clients.
In the early 2000s, for example, a cup of coffee cost roughly $1, but today might cost more like $5 to $6, depending on where people live, said Gomez, a member of CNBC’s Financial Advisor Council.
“That cup of coffee won’t be $6 in 40 years; it’ll be much higher,” Gomez said. “You’re still going to want to buy that cup of coffee, take that vacation, in 40 or 50 years. How do you do that? It’s by investing.”
Why cash still matters
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Of course, there are some caveats.
For one, households generally shouldn’t avoid cash altogether.
Households do need at least some cash on hand, whether for emergencies or perhaps for savings toward a short-term purchase like a car or house, according to financial experts.
It generally wouldn’t be wise to subject a down payment for a home to the volatility of the stock market, for example, Gomez said.
And, households should generally think of holding two to six months of additional cash in an emergency fund for unexpected financial shocks, he said. Some people should hold more, perhaps if they are employed in an industry at relatively high risk of layoffs, he said.
Different types of cash accounts
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Further, not all cash is created equal.
“Cash,” in finance lingo, is shorthand for liquid, readily available funds invested conservatively and subject to relatively little market risk.
It could refer to many different things: perhaps U.S. dollar bills stuffed under a mattress, money held in a checking or savings account at a traditional brick-and-mortar bank, a certificate of deposit, money market fund or high-yield savings account offered by an online bank.
If you keep everything in cash, you’re essentially losing money year to year.
Uziel Gomez
founder of Primeros Financial
Some cash accounts, like high-yield savings accounts and money market funds, generally pay relatively higher interest rates than some other forms of cash.
For example, $10,000 invested in a money market fund 30 years ago would still have lost value due to inflation, but less than physical bills under a mattress, according to BlackRock. It’d be worth about $8,850 compared to $4,700, Blackfound found.
Interest rates on cash moved higher as the Fed raised its benchmark rate to combat inflation. Now, however, interest rates are moving down again, meaning savers can expect their cash returns to fall, too.
“With rates moving lower, holding too much cash could mean losing purchasing power if inflation stays sticky,” wrote BlackRock’s Chaudhuri.
For example, the top high-yield savings account on the market paid almost 5.6% interest rate in July 2024, according to Bankrate. Today, that rate is just over 4.2%, it found.
“With the Federal Reserve still undecided on a possible rate cut in December, yields are likely to stay relatively flat into early 2026, pending clearer economic signals,” Stephen Kates, CFP, a financial analyst at Bankrate, wrote in an email.
Make investing ‘boring’
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Investing may feel like a foreign concept to many people, which may paralyze people and prevent them from moving forward, Gomez said.
The first step is to evaluate the financial goal, Gomez said, i.e. why you’re investing: Are you investing for a retirement that’s potentially decades down the road? In that case, one can generally afford to own more stocks, he said. Or, if it is for a more short-term goal, then someone should generally be invested more conservatively, perhaps in cash or bonds, he explained.
“That’ll be the blueprint as to what risk you can tolerate,” he said. “If the why is, I want to save for a home, that investment will look very different than saving for retirement.”
Then, the actual investment comes down to diversification, he said. That means not being too dependent on any one stock or industry, and being diversified across U.S. and global stocks, for example, he said.
Investors can consider owning a one-and-done mutual fund or exchange-traded fund, whereby a professional asset manager handles the diversification for investors behind the scenes, according to financial advisors. Investors also may choose to automate saving money into that fund or funds, too.
“Ultimately, investing should be boring,” Gomez said. “It’s usually set it and forget it.”
“You don’t need to be perfect to start, but you need to start to be perfect,” he said.
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