Keeping large amounts of cash on hand is a controversial topic. Some people believe carrying cash is dangerous and opens you up to theft or loss. Others think cash allows more privacy and freedom than electronic payments. There are good arguments on both sides. This article will examine the pros and cons of keeping significant cash reserves so you can decide if it makes sense for your situation.
Why Do People Keep Large Cash Reserves?
There are several reasons why individuals and households decide to keep sizable amounts of cash:
- Privacy – Cash transactions are essentially anonymous. Electronic payments through banks leave records and generate data about your spending habits and patterns. Cash offers more privacy.
- Fear of bank account seizures/closures – Some people worry about governments or creditors freezing bank accounts or seizing funds. Keeping cash makes it harder for third parties to control your money.
- Concerns over banking system – In times of economic instability, some lose trust in banks and prefer holding their own cash reserves. This provides independence from financial institutions.
- Saving for large purchases – Building up cash savings can allow you to make large purchases with cash rather than financing. This avoids interest payments.
- Reduces spending – Studies show people tend to spend less when using cash instead of cards. The tangible nature of cash parts you with money more “painfully.”
- Backup emergency fund – Cash serves as a reserve to draw from in emergencies or during power outages when electronic transactions aren’t available.
- Avoiding taxes – Keeping cash reserves can make it easier to hide money from taxation or engage in tax evasion, depending on jurisdiction.
These factors make keeping cash reserves attractive for some households. However, there are also risks involved.
Risks of Holding Large Cash Reserves
While keeping cash has benefits, there are also notable drawbacks:
- Theft – Cash is a popular target for thieves and burglars. Safes can be broken into and cash is anonymous and untraceable once stolen.
- Loss – Cash can be misplaced or accidentally destroyed. It lacks the protections electronic accounts have against fraudulent withdrawals.
- Damage – Cash can become unreadable or damaged due to fires, floods, or other disasters.
- Lack of interest – Unlike savings accounts, cash does not earn any interest over time. Inflation erodes its actual value.
- Transaction limitations – Many large purchases like cars or real estate require electronic payment transfers.
- Storage inconvenience – Storing and safeguarding large amounts of cash is more inconvenient than electronic money.
- Suspicion – Carrying large cash sums can raise suspicions from authorities or banks about criminal activity.
- Declining usage – As more purchases become electronic, the utility of cash diminishes over time.
These risks must be weighed carefully when deciding whether cash savings make sense. Responsible cash storage and security precautions can help mitigate some of the drawbacks.
How Much Cash Is Too Much?
There are no definitive guidelines on ideal cash reserves. Some basic considerations include:
- Emergency fund – 3-6 months of living expenses in cash is reasonable for emergency preparedness.
- Large purchases – Saving up known upcoming big expenditures can justify additional cash.
- Income level – Higher income households can set aside larger amounts of cash more comfortably.
- Security capability – Only keep what you can securely store based on your home setup and risk tolerance.
- Insurance – Make sure you have adequate property or homeowners insurance for cash theft/loss scenarios.
As a very general rule, holding more than $10,000 in cash may be considered excessive for the average household. Higher amounts increase risk without necessarily providing additional benefits in financial flexibility or privacy. However, individual circumstances vary widely.
How To Reduce the Risks of Cash Hoarding
If you do choose to keep substantial cash savings, some tips can help reduce the pitfalls:
- Use a home safe – Bolt safes to the floor and use those with anti-theft design features.
- Safe deposit box – Rent a bank safe deposit box for larger amounts exceeding home storage capability.
- Home security system – Install a monitored security system to deter break-ins.
- Hide cash creatively – Use clever hiding places burglars won’t easily find.
- Split up stashes – Divide cash into multiple hidden locations rather than one big pot.
- Avoid talking about it – Don’t reveal to others you are keeping significant cash reserves at home.
- Make withdrawals discreetly – Use different banks over time and in small increments to get cash.
- Get insurance – Have adequate property and homeowner’s coverage for theft and disasters.
With prudent precautions, the risks of cash hoarding can be minimized. But no storage method is completely foolproof against theft or misfortune.
Alternatives to Cashing Hoarding
If you are uncomfortable hoarding large amounts of physical cash, there are alternatives that provide some of the same benefits:
- Precious metals – Gold/silver can be stored securely and avoid inflation erosion.
- Gemstones – Small high-value gems are another compact store of value.
- Cryptocurrency – Digital currency offers privacy advantages over bank accounts.
- Foreign accounts – Banks in jurisdictions outside your home country provide diversification.
Diversifying savings across different currencies, asset classes, and institutions reduces risk compared to a single cash hoard.
Conclusion
Here is a summary of the key points on whether substantial cash reserves make sense:
- Cash provides privacy, reduces spending, and protects during emergencies/instability.
- But cash carries risk of theft, loss, damage, and lack of interest.
- Holding more than $10,000 raises risk without much extra benefit for most.
- Take precautions like safes, home security, and insurance if keeping cash.
- Alternatives like precious metals, gemstones, crypto, and foreign accounts diversify risk.
In the end, your specific situation dictates the ideal cash reserves. Just be aware of both the benefits and vulnerabilities that come with holding significant cash savings at home. As with any financial decision, prudent analysis helps maximize upside while minimizing downside risk.
Cash Reserve Scenarios
Here are a few examples to illustrate how cash reserve needs vary by individual circumstance:
Example 1 – Young Single Renter
John is 27 years old, single, and rents an apartment. He has:
– $3,000 monthly net income after taxes
– $1,000 monthly expenses
– $5,000 emergency fund already saved
For John, keeping more than $5,000 cash on hand probably doesn’t make sense. Since he rents, he has less need to self-finance large expenses or repairs. His existing emergency fund covers 6 months of expenses already. As a young single person, he likely goes out frequently and uses electronic payments. Keeping large amounts of extra cash risks theft/loss without providing John much advantage. He may be better served putting additional savings into retirement accounts or other investments rather than cash hoarding.
Example 2 – Middle-Aged Homeowner
Debbie is 42 years old, married with 2 kids, and owns a suburban home. She has:
– $8,000 monthly net family income after taxes
– $5,000 monthly expenses
– $10,000 emergency fund already saved
– Plans to remodel kitchen ($25,000 budget)
In Debbie’s case, saving up some extra cash to finance the kitchen remodel with cash makes sense. While $10,000 would cover over 2 months of normal expenses, adding $15,000 cash for the remodeling project avoids taking out consumer loans. This larger $25,000 cash reserve is reasonable given the big planned purchase. Her home also justifies having a secure safe since burglary is a greater risk than for an apartment rental. After completing her kitchen overhaul, Debbie could reduce her cash reserves back down under $10,000 again.
Example 3 – High Net Worth Senior
Greg is 68 years old, married, owns a large house, and is retired. He has:
– $20,000 monthly retirement income
– $7,000 monthly expenses
– $500,000 investment portfolio
– $50,000 emergency fund
With greater wealth and assets, Greg can more reasonably keep larger amounts of cash on hand. He faces lower risk of financial ruin from theft compared to lower net worth individuals. His age also means he relies heavily on cash for in-person spending rather than electronic payments. Keeping $100,000 or more available makes sense given his existing savings and projected needs. He has sufficient income and insurance coverage to replenish any lost reserves. A key consideration is making sure his home safe storage is rated to handle cash amounts exceeding typical burglary targets.
Cash Reserve Decision Factors
In summary, here are some key factors to consider when determining appropriate cash reserves:
- Your net worth and asset level
- Planned big ticket purchases
- Income stability
- Types of spending/payments used frequently
- Existing emergency fund coverage
- Insurance coverage and security precautions
- Age and household members
- Home ownership vs. renting
- Credit availability
Rather than a one-size-fits all rule, the right cash hoarding amount depends greatly on your specific situation. The examples illustrate how needs vary substantially based on living context. By balancing the benefits of cash reserves against the risks, you can arrive at prudent cash levels. Just be sure to take measures to safeguard cash and have adequate insurance in the event of loss.
Historical Cash Hoarding Trends
Cash usage and hoarding tendencies evolve over time as technology, banking, and economies change. Looking at historical trends provides useful perspective.
Cash Usage in the United States
| Year | Cash in Circulation | Cash Transactions Volume |
|---|---|---|
| 1980 | $80 billion | 89% of retail transactions |
| 2000 | $430 billion | 73% of retail transactions |
| 2020 | $2 trillion | 26% of retail transactions |
Cash usage grew substantially in absolute terms over the past decades, but fell relative to other payment methods. Cards and digital payments displaced much cash spending, especially for small routine purchases.
Cash Hoarding in the United States
However, despite less frequent cash transactions, cash hoarding in America still persists:
- As of 2021, roughly 33% of transactions under $10 are still done in cash.
- In 2019, 46% of Americans carried $20 or less on average.
- But 11% of Americans regularly carry $100 or more in average cash holdings.
- Men are more likely to carry cash than women at all age levels.
- Younger generations aged 18-29 use cash less frequently than older demographics.
- But seniors aged 65+ tend to keep higher cash balances on hand.
So cash is still far from dead, even though its importance diminishes over time compared to past eras.
International Cash Hoarding
Cash usage varies significantly between different countries and regions:
- Japan – Cash is still used for 80% of transactions due to cultural factors.
- Northern Europe – Cards dominate with cash under 10% of spending.
- Southern Europe – Cash remains much more common at around 65% of transactions.
- China – Mobile payments are displacing cash more rapidly than elsewhere.
- Africa – 90% cash share due to lack of electronic payment infrastructure.
- India – Demonitization cut cash share from 90% to 45% recently.
These large regional differences demonstrate that culture, infrastructure, and regulations drive cash usage – not just convenience or technology.
The Future of Cash and Cash Hoarding
Looking ahead, here are some predictions for the future trends of cash usage and hoarding:
- Cash will decline but persist in the foreseeable future, not disappear.
- Growing financial inclusion and technology will reduce cash usage in developing countries over time.
- A significant minority of transactions will remain cash based, around 20-30% likely.
- Fears of digital surveillance and hacking will sustain cash hoarding appeal.
- But improved home storage security technology could deter widescale hoarding.
- Central bank digital currencies could replace physical cash long term in some nations.
- New payment methods like blockchain apps offer non-bank e-transactions to meet privacy concerns.
- Severe financial crises could spur cash hoarding resurgence temporarily.
Predicting technological change is difficult, but cash still seems poised to maintain a smaller but significant role. People ultimately desire both convenience and privacy, which will prevent cash from disappearing entirely. But its attractiveness for hoarding diminishes as security, stability, and alternative options improve. Society remains far from a purely cashless model, but the importance of physical currency will likely keep declining over the long run.
Takeaways
In conclusion, here are the key takeaways on cash hoarding:
- Cash provides privacy but comes with the risk of theft, loss, or damage.
- How much cash to keep on hand depends on individual circumstances and risk tolerance.
- Take security precautions when storing larger amounts of cash.
- Think about alternatives like precious metals or cryptocurrency to diversify savings.
- Cash usage is declining over time but persists more in some cultures and demographics.
- Cash will likely remain in use for the foreseeable future, but hoarding may diminish.
Carefully weighing the pros and cons allows you to make an informed cash reserves decision. With prudent precautions, keeping some extra cash can be advantageous depending on your specific situation. Just be sure to balance financial flexibility with risk mitigation tailored to your needs and comfort level.