For some people, “extra” cash in their accounts burns a holes in their pockets. They are ready to spend the money almost as soon as they get it, and that creates problems. On the other hand, some people can have large amounts of cash in their accounts and be too afraid to do anything with it. This also can be a problem. Accumulating cash for the sake of accumulating can keep you from your financial goals. Goals like saving for education, a home, or even a vacation. The best way to think about money is to take the least risk possible with what you have while still moving toward your goals.
For some, keeping money in a checking account seems safe and riskless, but in inflationary times, it can be very risky. Inflation risk is the risk that your money today will not be worth as much in the future. By not earning any interest, you are losing money to inflation. Inflation is most often measured by the Consumer Price Index (CPI).
As noted on the chart above, overall prices rose 6.2 percent over the past 12 months. This means your dollar buys less today than it did just last year.
There are many ways to earn interest on your cash and take very little to no risk. If you are in a large cash position, talk to your financial professional about ways to avoid inflationary risk in your finances.