Cash is king, right?
Well, not always. Sometimes you can have so much cash sitting around in your bank account that it turns into a wealth-devouring demon.
On average, American families had about $62,410 in their checking accounts, according to the Federal Reserve’s 2022 Survey of Consumer Finances. For most people, that balance is simply too high.
Here’s why keeping too much cash on hand could be a serious mistake and a significant drag on your financial health.
As of September 2025, the average interest rate on a checking account is just 0.08%, according to U.S. News. (1) That’s nowhere near enough to offset the rising cost of living.
In August, annual inflation was 2.9%, according to the Bureau of Labor Statistics. (2) At that rate, your money is likely to lose half its purchasing power in roughly 24 years.
But inflation isn’t the only problem. Idle cash also carries opportunity cost — the money you leave on the table when you don’t invest in assets that can generate income or growth.
To fight inflation, consider moving some of your money into short- or medium-term securities with higher yields.
For example, Vanguard’s Federal Money Market Fund (VMFXX) offered a 4.08% yield as of September 26. (3) That’s higher than the current inflation rate, which makes it an ideal option if you’re focused on preserving purchasing power.
If you’re more concerned about opportunity cost, you might look into a low-cost index fund. Vanguard’s S&P 500 ETF (VOO) has delivered a compounded annual growth rate of 14.7% since its 2010 debut. (4)
To be fair, past performance doesn’t guarantee future returns, but the point stands: keeping cash idle means missing out on growth.
Investing your cash in a diversified portfolio generally beats letting it sit in a checking account. But that doesn’t mean you should drain your balance completely. There’s still a healthy amount of cash you’ll want to keep on hand.
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Cash remains your best source of emergency funding. If you suddenly lose your job, face an unexpected medical bill or need a quick repair on your car, you’ll want fast access to some funds.
Most financial advisors suggest keeping an emergency fund worth three to six months of essential living expenses. To find your target, total up what you spend on necessities in an average month, then multiply by three or six.
Another approach is to multiply your after-tax monthly income to build a short-term buffer if you lose your job.
As with most money matters, cash management is a balancing act. Too much cash will drag your finances down and limit your ability to generate wealth, but too little can leave you vulnerable when life throws you a curveball.
Find the right balance that keeps you — and your family — both secure and growing.
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US News (1); Bureau of Labor Statistics (2); Vanguard (3, 4).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.