Is Holding Cash Costing You Money?

In today's financial climate, many investors are faced with a crucial question: Is holding onto cash really a wise decision, or is it costing them more than they think?  So,  If you’re an investor with a lot of cash on hand, it’s a good idea to pay attention to falling deposit rates because you just might be loosing money!

We’ve all heard the saying, “cash is king,” right? It highlights the benefits of having cash easily accessible for things like day-to-day expenses, emergencies, or even for seizing opportunities in the investment world.

According to data released in  by the Australian Prudential Regulation Authority (APRA), banks and other financial institutions in Australia had nearly $1.6 trillion in household deposits as of the end of January 2025. A significant portion of this cash belongs to self-directed superannuation investors.

In fact, the Australian Taxation Office (ATO) reported in February that self-managed super funds (SMSFs) held over $161 billion in cash and term deposits by the end of 2024. This represented about 16% of the $1 trillion in total SMSF assets as of December 31, 2024.

Why SMSFs Stick with Cash

Cash and term deposits have been popular investment choices for SMSFs for a long time, second only to Australian shares (which made up $277.6 billion, or 27.3% of total SMSF assets as of December 2024).

One reason for this preference is that around 35% of SMSF members are fully retired, meaning they are likely using their cash reserves through account-based pensions. Another 9% are partially retired, according to the ATO’s 2022-23 data.

However, recent cuts to savings interest rates should raise some concerns for SMSF trustees and other investors who are holding large amounts of cash.

The Impact of Falling Rates

While cash provides security, especially in a declining interest rate environment, it can also lead to long-term underperformance. As the Reserve Bank of Australia (RBA) lowered the cash rate by 0.25% in February, many mortgage lenders passed on the full rate cut to borrowers. However, this also meant that banks reduced the rates they pay on savings and term deposits.

Some banks had already begun lowering their deposit rates before the RBA’s announcement. According to financial comparison site Canstar, 20 banks had slashed term deposit rates by up to 0.95 percentage points ahead of the RBA’s decision. And since then, rates have continued to trend downward. For example, the top 1-year term deposit rate had been 5.45% until mid-2023, but it’s now fallen below 5%, with rates for terms up to two years ranging from 3.90% to 4.60%.

Weighing the Risks and Rewards

Cash is appealing because it’s low-risk and offers the safety of government guarantees (up to $250,000 per depositor if a bank fails). But keeping too much cash, especially during a period of declining rates, can result in missed opportunities for higher returns.

For example, over the past 30 years in Australia, the average annual return from cash was just 4.2%. Compare that to 5.6% from bonds, 7.8% from listed property, 9.1% from Australian shares, and 11.1% from U.S. shares.

The right amount of cash for your portfolio depends on your financial goals, risk tolerance, investment time horizon, and how close you are to reaching your goals.

• Risk tolerance is how much market risk you’re willing to take on based on your personal situation. Cash is on the conservative side of the risk spectrum, and with it, you’re likely to see lower returns.
• Time horizon refers to how long you plan to invest your money. The shorter the horizon, the less likely you are to benefit from riskier assets, like shares or bonds, which generally outperform cash over the long run but come with more volatility.
• Funding level is how close you are to achieving your investment goal. If you’re nearly there, you might feel comfortable with some cash. But if you’re still far from reaching your goal, you may want to allocate more to riskier assets for the chance of higher returns, especially if you have a longer time horizon.

In the end, while cash can provide peace of mind, balancing it with other investments might help you reach your long-term financial goals more effectively.  If you'd like to discuss your options, please contact us today for a complimentary consultation.

 Chris Tolevsky has over 30 years experience in the medical and allied health fields.  He provides expert guidance on tax strategies, building and protecting wealth . If you’re interested in discussing how we can help you please book a complimentary consultation. 

Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable