Holding Too Much Cash Isn’t Growing Your Personal Wealth. Do This Instead

Having an emergency fund generally is a good thing.

Having too much cash, however, can hold back growing your overall wealth.

It’s especially important for younger investors to make sure they’re putting money into the stock market, as they have the most to gain from a long investment horizon.

Yet investors in their 20s may be too conservative — this age group has more than 28% of their wealth in cash, according to a survey from financial services company Personal Capital. That is more than any other cohort besides retirees in their 80s and 90s, who have 29% and 31% in cash, respectively.

“Sometimes instead of putting a plan in place, it’s easier to not think about it,” said Michelle Brownstein, a certified financial planner and senior vice president of Personal Capital’s private client group. 

Lack of education

Younger people, especially those just starting out, may not know how much they should be investing in the stock market or where it makes the most sense, according to Brownstein.

A lack of focus, especially for long-term goals such as retirement, may mean younger people are leaving money on the sidelines, she said. Some are diligent savers but miss the next step of how much they should be contributing to investment accounts such as an individual retirement account or even a brokerage account.

Millennials and Generation Z may also have competing financial goals, such as buying a house or getting married.

And it’s important, of course, to have an emergency fund, something that many have found is even more of a priority after the coronavirus pandemic. Generally, personal finance experts recommend having three months to six months — or even longer — of living expenses in cash in case of an emergency.

But, if you have met that goal and are continuing to save, that extra money should be going into an investment account, according to Brownstein, especially if you don’t plan on needing it for anything in the next few years.

“If it’s not cash they need in the next 18 months, it should be invested,” she said.

The power of the stock market

Investing in the stock market is one of the best ways to build wealth. By keeping too much cash on the sidelines, younger investors could miss out on years of healthy returns that would benefit them.

That’s because the longer you have for your money to compound — basically, your interest earning interest — the more you will accumulate even if you start with a modest amount.

“The other good thing about investing in the stock market is that it’s relatively easy,” said Roger Ma, a CFP at lifelaidout in New York and author of “Work Your Money, Not Your Life,” adding that options such as target-date funds and index funds help simplify the process.

Even those without employer-sponsored retirement plans can invest with little to no cost, said Ma. There are many low or no-cost brokerage options that almost anyone can access to begin buying stocks, and some mutual funds and exchange-traded funds have zero expenses, he said.

It’s important to have long-term savings growing because if you aren’t earning returns on the money, its buying power will be eroded by inflation over time, according to Lauryn Williams, a CFP and founder of Worth Winning in Dallas. That means that as costs rise, you’ll need to save more and more to be able to afford the same things, she said.

“If you instead put your money into the market now, you can start to earn an additional amount above and beyond,” she said.

Getting on the right track

If you aren’t sure that you’re saving and investing enough for retirement, there are a few things you can do to assess your situation, according to Brownstein.

First is making sure you have an emergency savings fund that you’re comfortable with, she said. Then, ensure you’re taking advantage of any match your employer offers for contributing to a retirement account if you have one.

“If you aren’t putting in enough to get the match, you’re leaving money on the table,” she said.

She also recommends taking the time to educate yourself on saving and investing, and either planning yourself to meet your goals or seeking guidance from a qualified financial advisor.

“Not knowing how to do something means I should work on it and learn it,” she said. “No one else is going to make sure you have enough for retirement — that’s on all of us.”




Source: CNBC
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