Is your cash costing you?
Written and accurate as at: Jan 14, 2026 Current Stats & Facts
Having a healthy amount of cash in the bank can provide a sense of security. It gives you a safety net for emergencies and ready access to funds when you need them. But holding too much cash, especially for long periods, can come with hidden costs.
Inflation erodes the value of cash
There’s an important difference between the nominal value of cash and its real value. The nominal value is the number you see in your bank account – $100 you have today will still show as $100 next year. The real value, however, is what that money can actually buy, and that’s where inflation comes in.
As prices rise, the real value of your savings gradually erodes. Even though your balance hasn’t changed, each dollar has less purchasing power than before.
Parking your money in a savings account that earns interest can help slow this erosion, but depending on where interest rates sit, it might only be by just. And if inflation is higher than your interest rate, your real return is negative, meaning you’re effectively losing money.
Missed investment opportunities add up
Risk and return tend to go hand in hand, and cash is one of the lowest-risk, lowest-return assets available. In contrast, assets that sit at the higher end of the risk spectrum – like shares – are known to deliver much stronger returns over long horizons.
To illustrate what this means for your savings, let’s imagine two people – James and Laila. James invests $20,000 in a savings account with an interest rate of 4% p.a., while Laila invests the same amount in a diversified portfolio of shares, which (in this example) have an expected return of 7% p.a.
In three years’ time, the difference between both balances won’t seem so stark – around $22,500 for James and $24,600 for Laila. But over a longer period that gap widens considerably. In 25 years, James will be sitting on around $54,300, while Laila will have eclipsed him with a balance of $114,500.
That difference is because the compounding effect – which is when your returns start generating returns of their own – is much greater when the rate of return is higher. Of course, returns from shares are never guaranteed and markets can fluctuate, but that opportunity cost is hard to ignore.
So how much cash should you hold?
Ideally, you should have enough cash on hand to cover three to six months of living expenses. This is to help you weather unexpected events like job loss, medical issues, or urgent home or car repairs – without having to sell your investments at an inopportune time.
To figure out your ideal emergency fund size, work out how much you spend in a typical month and multiply that figure by three to six times. Any cash you have above this amount could be considered ‘surplus,’ and may be better off working harder for you elsewhere.
What should you do with the extra money?
If your emergency fund is fully stocked and you have enough money for your short-term goals, there are plenty of options for putting surplus cash to work. As always, the right choice will depend on your financial goals, time horizon, and how comfortable you are with risk.
- Pay down debt: Using extra cash to pay off high-interest debt, like credit cards or personal loans, can improve your cash flow and free up money for more productive uses.
- Top up your super: Your super is one of the most tax-effective savings vehicles available to you, and even modest contributions now can make a big difference later on (especially if you’re still decades out from retirement).
- Invest in the market: For long-term goals, you might consider investing in a diversified portfolio of shares or ETFs, for example. This can give your money more of a chance to beat inflation over time.
Taking the steps to move your money from the perceived safety of cash can feel daunting, so make sure to seek guidance if you need it. A financial adviser can help you create a plan that aligns with your goals, and ultimately guide you on the right balance between risk and return.