Is it Possible to Have Too Much Cash
Cash feels good. It’s certain. It’s liquid. It lets you sleep at night. But like keeping all your plants in the shade, too much “safety” can stunt growth. The question isn’t whether cash has a role in your broader financial strategy—it absolutely does. The question is where the line sits between prudent reserves and a drag on your long-term plan.
As a general rule of thumb, it is a good idea to cap the amount you park in cash to just one full year of essential living expenses. This is because most white-collar professionals who are laid off don’t go a full 12 months without earning an income, and keeping significantly more than that on the sidelines exposes you to inflation risk without commensurate benefit.
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For instance, if your core monthly spend amounts to $6,500, a cash buffer of roughly $78,000 is ample. And any dollars above that can usually work harder elsewhere without meaningfully increasing your overall risk.
Why too much cash becomes a problem
Cash is deceptively expensive. High-yield savings rates look attractive, but the buying power of that balance is steadily chipped away by inflation and taxed as ordinary income. When you hold far more than you need, you’re voluntarily accepting a lower expected return and higher tax drag versus other defensive choices.
Behaviorally, large idle balances also make it harder to be disciplined. It’s easy to tell yourself you’ll “invest when things calm down,” but markets tend to rise before they feel comfortable. Meanwhile, your excess cash keeps lagging.
Say you parked an extra $150,000 in savings at 4.5% for the last two years while inflation averaged close to 3%. After ordinary income taxes, your real return could be close to flat or negative, depending on your tax bracket. But a modest shift toward short-duration U.S. Treasurys might have kept liquidity high, returned a similar yield, and trimmed the tax bite—all without committing you to the volatility of the broader stock market.
“Moving out of cash” doesn’t mean going fully risk-on
One of the biggest misconceptions is that you have to jump from a savings account straight into speculative stocks or crypto to make your money work. However, there is certainly a middle lane that is designed for stability of principal, income, or both.
In addition to short-duration U.S. Treasury bills, another option—with more risk than Treasurys but still a far cry from owning individual growth stocks—is a real estate investment trust (REIT). REITs are income-oriented and required to distribute most of their taxable income to shareholders annually. They can provide diversification and yield, and they don’t require you to be a landlord.
Two important caveats. First, REITs are not cash substitutes—prices move with interest rates and real estate fundamentals, and dividends are taxable. Second, within REITs, industry exposures differ wildly (apartments vs. industrial warehouses vs. data centers), so diversification and time horizon matter.
Pay attention to the tax drag
Interest you earn in a bank savings or money market deposit account is taxable as ordinary income at both the federal level and, in many cases, the state level. Yet, investors often forget to consider how much of their earnings on cash go to the government.
At a minimum, it often makes sense to consider shifting some reserves into short-term government bond funds. These vehicles are designed to be liquid, generally yield in line with high-yield savings accounts, and—critically—are exempt from state and local taxes. For someone in a high-tax jurisdiction, that exemption alone can translate into a meaningfully higher after-tax return without taking on additional credit risk.
An overlooked feature of REITs is the way their distributions are taxed. Unlike dividends from traditional stocks, which are typically categorized as qualified dividends and taxed at capital gains rates, REIT payouts can be split into multiple components. And in many years, a portion of a REIT’s distribution is classified as a return of capital rather than income.
If you’re on the cusp of a home purchase, a tuition bill, or some other near-term major expense, cash remains king because the risk of a poorly timed investment matters more than any potential return. Similarly, retirees using a “bucket” strategy may want to keep more than a year’s worth of withdrawals in cash and short-term bonds to reduce sequence of return risk.
But for most other working-age individuals, holding more than a year’s worth of expenses in cash often means letting inflation and taxes quietly eat away at your wealth. Beyond that threshold, dollars can usually be put to better use in vehicles that balance safety with growth. Your goal should be to make sure every dollar in your portfolio is working with intention. And cash should be there to protect you from life’s surprises, not become a drag on your financial future.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE