According to a survey from 2023, only 8% of millionaires would characterize themselves as wealthy these days (1). This surprising statistic suggests that financial security is about more than just the amount of money you have in the bank. One factor that could be affecting how wealthy people feel is their relationship with their money.
Let’s explore a common behavior: keeping a large sum of cash readily available in a checking account instead of investing it. While financial professionals might help you consider investing for long-term growth, some people prioritize the comfort of having easy access to their money.
The Psychology of Cash
There are a few reasons why someone might prefer to hold onto cash:
- Security: The idea of having a large buffer in their checking account can provide a sense of security, especially for people who have experienced financial hardship in the past.
- Fear of Missing Out: Constantly monitoring a brokerage account can be stressful, and some people may worry that they’ll miss out on the perfect time to sell an investment. Keeping cash readily available allows them to feel more in control.
- Tangibility: Seeing a high checking account balance can provide a more tangible sense of financial security than watching investment values fluctuate.
Cash vs. Investing: The Trade-Off
While holding onto cash might provide some psychological comfort, it’s important to remember that inflation can erode the purchasing power of your money over time. For example, if inflation is at 2% annually, then $10,000 today will only be worth about $9,800 in a year.
Investing, on the other hand, has the potential to grow your money over time, outpacing inflation and helping you reach your long-term financial goals. There are many different investment options available, with varying levels of risk and return.
Finding the Right Balance
Ultimately, the decision of how much cash to keep on hand is a personal one. There’s no one-size-fits-all answer, and what works for one person might not work for another. However, it’s important to weigh the potential benefits of having easy access to your cash against the potential drawbacks of missing out on investment growth.
If you’re unsure about how much cash to keep in your checking account, talking to a financial professional can be helpful. Together, we can help you create a financial plan that considers your individual needs and risk tolerance.
Source:
(1) Jdickler. “31% of Millionaires Say They’re Part of the Middle Class, Survey Finds. ‘people Feel Squeezed,’ Advisor Explains.” CNBC, 10 Nov. 2023, www.cnbc.com/2023/11/10/survey-31percent-of-millionaires-say-they-are-part-of-the-middle-class.html.
Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues.
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