Keeping physical cash on hand can give you a level of certainty in uncertain times.
But the reality is that keeping too much cash on hand can actually hurt your long-term financial situation.
We explore how hoarding cash can negatively impact your ability to get ahead financially .
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1. Missed opportunities
When you tuck physical cash under your mattress, you miss opportunities to grow your funds. Physical cash collects nothing but dust. In contrast, investing those funds in the stock market or placing them into a savings account could help you grow your savings.
For example, a high-yield savings account allows you to take advantage of compound interest. Your cash earns interest, and the cash you earn continues to grow in interest earnings.
If you’re comfortable with more risk, investing your cash into the stock market could yield higher returns. Either option gives you an opportunity to grow your funds.
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Keeping all of your cash on hand for the long term has a bigger impact on your financial future. Without investing your funds, it’s difficult to meet your long-term financial goals.
For example, reaching your retirement goals with the help of investing in the stock market is challenging enough. But if you leave the cash in your closet, it becomes almost impossible for savers to reach their retirement goals.
3. Decreasing purchasing power
Inflation can take a bite out of your purchasing power, especially if you choose to keep your funds in physical cash. As the cost of goods and services increases, you’ll find that your cash funds don’t stretch as far.
When you opt to tuck their funds into a high-yield savings account or invest the funds, your cash has a better chance of keeping up with inflation.
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4. Potential for loss
In some ways, holding physical cash is more of a risk. If something happens to that cash, you’ve lost a significant chunk of your resources.
For example, if a fire destroys your house, you might lose all of the cash inside. Or if someone breaks into your home and steals the cash, it might never be recovered.
Even if you live in a low-crime area and store your funds in a fireproof safe, you can never completely eliminate the potential for loss.
5. Lack of forward planning
When you keep a lot of physical cash, you’re likely considering using the funds to protect yourself from short-term cash flow issues.
While it’s important to have some emergency savings, storing too much physical cash forces you to miss out on potential growth opportunities.
Instead of focusing solely on defensive money moves, it’s a good idea to consider some strategies to grow your funds for the long term.
Consider the fact that growing your funds can set you up for a better financial future than you’d have if you continue to eschew investing in favor of hoarding physical cash.
6. Cashless transactions on the rise
During the pandemic, many merchants shifted to cashless transaction options. Some businesses are still sticking with cashless transactions, which could make physical cash an inefficient way to purchase goods and services.
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Since you can choose to work with an FDIC-insured institution, your funds can be protected for up to $250,000, making this a low-risk way to store your funds.
If you shop around, you can find high-yield savings account options. Some high-yield savings accounts present an excellent opportunity to grow your funds within the safety of an FDIC-insured account.
Bottom line
Although it’s not a bad idea to keep a small amount of physical cash on hand for emergencies, investing your funds for the long term is generally a good idea.
Otherwise, you might miss the opportunity to build wealth for a secure financial future.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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