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Stop Keeping Cash Reserves

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Is there even such thing as having and keeping to much cash? To some people, this may be hard to believe, buy having too much in savings can be a problem. Although having a nice sum of savings sound perfect in theory, in reality, it never works that way.

Too Much Money Sitting In Cash?

There may be a time in your life when you realize that you have too much money sitting in cash. For some people, it’s more than a common occurrence, especially if they are retired or about to retire. Unless you recently received a large amount from the direct sale of a family home or an inheritance, it probably just sneaked up to you without you realizing that.

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You are probably thinking about how it can sneak up to you with you realizing it? Well, in most cases it starts with having a few thousand dollars extra. When you have the extra money in your checking account, and you leave it in a year or two you will realize that got a far larger amount at your account or even a credit union. Things change with time, including the stock market. That being said, your extra money becomes a sort of a security blanket. But, in the long run, this money brings more harm than good.

What Can Be The Harm?

Although you may not be aware of it, there could be a downside of leaving too much money in cash. Having too much money in cash can cost you an opportunity. You don’t want to look back in 20 years from now and realize that, if you had simply invested that extra cash you would have a far better return. Of course, there is always some short-term uncertainty of returns, but in the long run, you would have far more. For example, if you have an extra of $100,000 and you invest it at a 7% return, in 30 years you could have around $400,000 or $140,000 in just five years.

How Much Is Really Too Much?

People save money for three reasons:

  • Safety or emergency reserve – this is usually the first reason and it general brings between three to six months of living expenses.
  • Major investments – this money is set massive expenditures that you can foresee in the next two to four years, such as needing a new car, setting the baby room, college tuition and so on.
  • Not to worry – the third reason is always related to mind, meaning that you want to save the money so you can sleep at night. Some people call it even ‘petting money’ – you don’t need it, but you just feel safe knowing it’s there and that you can ‘pet’ it anytime you want.

Whatever the reason for saving money could be, it is up to you to set how much of cash you want to save in. That being said, another consideration is how much you have in investments that are:

  • not in your 401(k)
  • IRA
  • readily liquid at full or near-full value

For example, if you have bond funds that fluctuate very little, you just know that you can access that money in a matter of days without big losses. If you have bond funds or bonds that fluctuate very little, you should know that you should access that money in a matter of days without taking any enormous losses, so you can view that as part of your emergency reserve.

On the other hand, stock funds and stocks are liquid but might be down in value at the time you happen to need cash. That’s the main reason why stocks should not be considered part of your cash reserve. Moreover, it’s one of the reasons you should invest money in the stock market that you won’t need for at least five years.

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