Having money in the bank feels reassuring.
You can see it. You can access it. You know exactly how much is there. And unlike investments, its value doesn’t appear to jump up and down every time you check your account.
So, keeping a healthy amount of cash can be a very sensible part of financial planning.
But is it possible to have too much?
For some people, the answer is yes. While cash is important for emergencies and short-term spending, holding more than you realistically need for long periods could mean your money gradually loses spending power and misses opportunities for long-term growth.
The question isn’t simply, “How much cash should I have?”
A better question is:
“What is this money for, and when am I likely to need it?”
Why do we like holding cash?
There are plenty of good reasons.
Perhaps you’re worried about unexpected bills. Maybe you’re planning a house move, a new car or a big holiday. You might be approaching retirement and feel more comfortable knowing you have a sizeable cash reserve.
Or perhaps you’ve accumulated savings over the years without really deciding what to do with them.
Cash can also feel particularly attractive when investment markets are uncertain. When headlines are talking about falling markets, political uncertainty or economic problems, seeing your money sitting safely in a savings account can be comforting.
And there is nothing wrong with that.
The problem comes when “keeping some money safe” gradually becomes “keeping everything in cash indefinitely.”
That’s when it may be worth looking at the bigger picture.
How much should you keep for emergencies?
An emergency fund is one of the foundations of a sensible financial plan.
The boiler breaks. The car needs replacing. You suddenly face an unexpected expense. Having accessible savings means you don’t necessarily have to borrow money or sell investments at an inconvenient time.
You may have heard rules such as keeping three or six months’ expenditure in cash. They can be useful starting points, but there isn’t one number that works for everybody.
Someone with a secure salary, relatively low monthly outgoings and two household incomes may feel comfortable with a different emergency fund from someone who is self-employed, retired or has significant financial commitments.
Your emergency fund should reflect your life rather than somebody else’s rule of thumb.
Don’t forget your short-term plans
Your emergency fund isn’t the only money that may sensibly belong in cash.
Think about what you expect to spend over the next few years.
Are you planning a wedding? Helping children with a house deposit? Buying a new car? Renovating your home? Taking a once-in-a-lifetime holiday?
If you know you’re likely to need the money relatively soon, keeping it readily accessible can make sense.
That’s because investing comes with risk. Markets can fall as well as rise, and you don’t want to find yourself needing £30,000 just after the value of your investments has fallen significantly.
You could be forced to sell at exactly the wrong time.
Cash therefore has an important job: providing certainty for money you know you’re going to need.
But cash isn’t completely risk-free
We tend to think about risk in terms of losing money.
If you have £50,000 in the bank today and still have £50,000 next year, it can feel as though nothing has changed.
But there’s another type of risk: inflation.
Inflation means the cost of goods and services increases over time. As prices rise, the same amount of money buys less.
Imagine you leave a substantial sum sitting in cash for 10 or 15 years. The number on the bank statement may look reassuring, particularly if you’re earning interest, but what really matters is what that money can buy.
If the return on your savings consistently fails to keep pace with inflation, its real purchasing power gradually falls.
That may not matter for money you’re spending next year.
It could matter considerably for money you’re hoping will support you in 10, 20 or 30 years.
Cash versus investing – it doesn’t have to be one or the other
People sometimes think financial planning involves choosing between cash or investments.
In reality, most good financial plans involve both.
Cash can provide stability, accessibility and certainty.
Investments can provide the potential for longer-term growth, although their value will fluctuate and you could get back less than you invest.
The key difference is often timescale.
Money you need soon generally shouldn’t be exposed to investment risk simply in pursuit of a better return.
Money you aren’t likely to need for many years is a different question.
Leaving substantial long-term savings entirely in cash could mean sacrificing the opportunity for growth and making it harder for your money to keep pace with inflation.
That’s why it can help to give different parts of your money different jobs.
Give your money a timescale
Instead of looking at your savings as one big pot, try separating them according to what they’re actually for.
For example, you might have money for:
- emergencies and unexpected costs
- spending planned over the next few years
- medium-term goals
- retirement and other long-term objectives.
Once you’ve done that, you can start asking whether each pot is sitting in the right place.
Your emergency fund needs to be accessible.
Money for next year’s new kitchen probably needs certainty.
Money intended to fund your lifestyle 15 years from now may have very different requirements.
This is where financial planning becomes much more useful than simply asking, “Which savings account pays the most interest?”
The danger of investing too much
If holding excessive cash has disadvantages, that doesn’t mean the answer is to invest everything you don’t immediately need.
Going too far in the opposite direction can create its own problems.
Investment markets move up and down. If you invest money that you know you’ll need shortly, you may not have enough time to recover from a market downturn.
Imagine investing money you plan to use for a house deposit in two years. If markets fall significantly just before you need it, you face an uncomfortable choice: delay your plans or sell the investments at a loss.
Investment decisions should therefore take account of your goals, timescale, attitude to risk and, importantly, your capacity for loss.
The objective isn’t to squeeze the highest possible return from every pound.
It’s to make sure your money is positioned appropriately for what you want it to do.
When did you last review your cash?
Cash balances can build surprisingly quickly.
Perhaps you’ve received a bonus or inheritance. Maybe you’ve sold a property. Your mortgage might have been repaid and you’re now saving considerably more each month.
Or perhaps you simply haven’t reviewed your finances for several years.
It can be useful to sit down and ask:
How much cash do I actually need?
Not how much feels reassuring when you look at your bank balance, but how much is realistically required for emergencies and planned expenditure.
Once you’ve identified that figure, you can look at anything above it and decide whether it could be doing something more useful.
That doesn’t automatically mean investing it. Depending on your circumstances, there may be other priorities such as repaying debt, making pension contributions, using tax allowances or setting money aside for future spending.
The important thing is that the decision is deliberate.
Cashflow planning can help answer the “what if?” questions
One reason people hold large cash balances is fear of running out of money.
That’s understandable, particularly when approaching or entering retirement.
You might wonder:
What if I live longer than expected? What if markets fall? What if I need to help my children? What if I have a large unexpected expense?
Cashflow modelling can help turn those concerns into something more tangible.
By looking at your income, expenditure, pensions, savings, investments and future plans together, you can model different scenarios.
What happens if you keep £100,000 in cash rather than £50,000?
What happens if inflation remains higher for longer?
What happens if investment markets fall?
What happens if you spend more during the first ten years of retirement?
Rather than choosing a cash figure because it simply feels safe, you can make the decision as part of a wider plan.
So, are you holding too much cash?
Maybe. Maybe not.
For some people, a large cash reserve is entirely appropriate. For others, money has accumulated in savings accounts without any real purpose and has remained there for years.
The important point is that cash should have a role within your financial plan.
Ask yourself:
What do I need this money for? When will I need it? How much needs to be immediately accessible? And what is the rest intended to achieve?
At Lazenby’s Financial Services, we look at cash as part of the whole financial picture – alongside investments, pensions, income, expenditure, tax planning and your future goals.
Because the aim isn’t to have as little cash as possible.
It’s to have the right amount of cash for you, while giving the rest of your money the opportunity to work towards your longer-term plans.
If you’re unsure whether the balance between your cash, savings and investments is right, a financial planning review can help you understand where you are now and whether your money is positioned appropriately for where you want to go.
The value of investments can fall as well as rise, and you may get back less than you invested. This article is for general information only and does not constitute personal financial advice.
