Cash is an important asset class. We recommend keeping an emergency fund for those “just in case” items – maybe an unexpected car repair. Or maybe you are saving for a vacation. Again, it should be in a money market fund or savings account. This money is immediately available without risk of investment loss.
For money not needed over the next few years, we usually recommend investing for the longer term. The difficult question is how much to keep in cash. In general, for an emergency fund, we recommend six to nine months of expenses or whatever amount allows you “to sleep peacefully at night.”
On the other hand, we do not recommend just holding on to cash because you don’t know what to do with it or you are worried about the market. There is a hidden penalty for keeping large amounts of cash that are not “working for you” as part of your long-term objectives.
The culprit is inflation. You can’t see its impact because $1 in savings continues to be $1 until you withdraw it. BUT, if you have $1 in your savings account today, will it buy the same goods and services years from now? The answer is a resounding NO.
Click here to view the impact of inflation.