By Michael "Drew" Tyler, CFA | August 2025
The Comfort and Cost of Holding Cash
Cash has its place in a sound financial plan. It provides stability, peace of mind, and quick access in an emergency. But holding too much cash for too long can quietly work against you, especially as interest rates begin to trend downward. Money market funds and high-yield savings accounts, which were yielding over 5% last year, are now offering closer to 4%. If the Fed cuts rates this fall, even those returns will start to shrink all while inflation continues to nibble away at your purchasing power.
Emergency Fund: Enough, But Not Excessive
For most households, a well-structured emergency fund should cover 3 to 6 months of essential living expenses. If both spouses have secure jobs and adequate insurance, closer to 3 months is often enough. In reality, your emergency fund’s purpose is to cover big, unexpected costs like insurance deductibles or temporary income disruption not to sit idle while your longer-term savings goals fall behind. If your cash cushion is much larger than necessary, that excess might be better deployed elsewhere.
What Should You Do With Extra Cash?
Once your emergency needs are covered, think about the opportunity cost of letting cash sit in low-growth vehicles:
You could be:
• Investing toward long-term goals in a diversified portfolio
• Maxing out tax-advantaged accounts like Roth IRAs or 401(k)s
• Paying down high-interest debt or saving for specific future expenses
Holding too much cash often feels “safe,” but it’s sometimes driven by uncertainty or analysis paralysis. In a high-inflation, potentially falling-rate environment, that safety could come at a cost.
Don’t Let Short-Term Safety Undermine Long-Term Strategy.
Cash plays a role but only the right amount, for the right reason. With markets anticipating Fed policy shifts, now is a great time to ask:
• Are you holding more cash than you need?
• Is that cash serving a specific purpose?
• Could it be better positioned to help meet your goals?
If you’re unsure, a fiduciary financial advisor can help you sort through the “what ifs” and put every dollar to its best use.
*This post is for educational purposes only and should not be considered financial advice.