Holding cash is necessary. But at some point, it becomes inefficient.
Many high earners, especially music executives with volatile income patterns or big financial responsibilities, default to holding large cash balances for safety. The problem is, cash loses value over time if it’s not used strategically.
This post breaks down the financial cost of holding cash beyond what you need—and how to think about your cash levels using actual numbers.
Why You Need Cash
There are good reasons to keep cash on hand:
- Liquidity for emergencies
- Cushion for income volatility
- Timing flexibility for large purchases or taxes
- Psychological peace of mind
But once those needs are covered, excess cash begins to underperform.
The Hidden Cost of Holding Cash
Cash in a bank account rarely keeps pace with inflation. Even with high-yield savings paying 4–5% right now, real returns may be close to zero once inflation is factored in.
Compare that to long-term average returns in other areas:
| Use of Funds | Historical Average Annual Return | Liquidity | Risk Level |
|---|---|---|---|
| High-Yield Savings | 4–5% (gross) | High | Very Low |
| Bonds | 4–6% | Medium | Low to Medium |
| Stock Market (S&P 500) | ~10% | Medium | Medium to High |
| Paying Down Debt | Matches interest rate avoided | N/A | Guaranteed Return |
*Sources: NYU Stern, SmartAsset, Bankrate, NerdWallet. Past performance is not a guarantee of future results. All investment decisions should consider your personal risk tolerance, liquidity needs, and financial goals.
If you’re holding large cash reserves earning 4% in a high-yield savings account while inflation is at 3.5%, your real return is about 0.5%. That’s before taxes.
In contrast, long-term investments have the potential to grow well above inflation, which builds purchasing power rather than losing it.
Example: The Cost Over 10 Years
Let’s say you hold $250,000 in cash for the next 10 years, earning 4% annually. Here’s how it compares:
- High-Yield Savings (4%): Grows to around $370,000
- Invested in a 60/40 portfolio (~7% return): Grows to around $492,000
- Difference: ~$122,000 in potential opportunity cost
Where you hold your money directly affects its long-term growth and usefulness.
How Much Cash Do You Actually Need?
This depends on your situation, but here are some common guidelines:
- Emergency fund: 6 to 12 months of fixed expenses
- Upcoming expenses: Anything needed in the next 12 to 18 months
- Cash flow buffer: 1 to 2 months of spending in checking
Everything beyond that may be underutilized and could be working harder elsewhere.
Final thought:
Holding cash gives you stability. But holding too much can quietly drag down your overall financial performance. Once your near-term needs are covered, it’s worth asking whether your cash is serving a purpose—or just sitting still.
👉 In the next post, we’ll explore the mindset behind holding cash and why many high earners hesitate to let it go.
