Why Hoarding Cash For Emergencies Is A Bad Idea

  Author: Jai Prakash

If there is one thing that the recent government’s recent demonetization initiative has done is to show to all of us the perils of keeping too much cash at home. The traditional wisdom has been to keep enough cash at hand so that one can have enough money during sudden emergencies and financial crisis. But this line of thinking is flawed.

Invisible devouring by inflation When you keep large amounts of cash, unknown to you the purchasing power of the cash keeps declining over time thanks to inflation’s impact. So, an emergency that could have been settled at Rs 25,000 would be required Rs 31,907 in five years at an annual inflation of 5%. This means you will need to keep more and more cash to meet the same head of expenses.

Apart from security issues of keep too much cash at home, you forgo the earnings possibilities for large amounts of money. These are the possibilities of earning some amounts if the money is invested in an investment option like fixed deposit or liquid fund.

With easy access to money from investments especially via digital payment systems such as bank and other mobile apps, it is no longer necessary to keep large amounts of cash at home for emergencies. For long, cash-at-hand was a tool of safety for Indians. It is only recently that they are beginning to get the true picture.