During a recent liquidity crunch, I kept thinking how nice it would be to have more cash sitting in my bank account. Once I received a $106,000 real estate capital distribution, I felt a tremendous relief. But then I was faced with the somewhat stressful decision of how to reinvest it.

My private real estate fund invested $47,000 of my capital in a deal seven years ago. It earned roughly a 12.2% internal rate of return, leading to the $106,000 capital distribution. For seven years, I didn’t think about my $47,000 investment at all until the surprise distribution came. It was nice, which is one of the main reasons why I enjoy investing up to 20% of my capital in private funds.

However, let’s talk about how having cash could make you poorer if you’re not careful. It’s a little ironic with so much talk about cash being king.

Why You Don’t Want To Have Too Much Cash

There are essentially three reasons why you want cash to be a tiny minority percentage of your net worth. Let’s discuss each in detail.

1) Cash is a Long-Term Loser

If you review my net worth allocation models, I suggest having no more than 5% – 10% of your net worth in cash, depending on the economic cycle and your personal financial situation. The reason is that cash has historically underperformed the majority of assets. Cash only tends to outperform when we’re in an economic downturn.

Fortunately for investors in stocks, real estate, and other risk assets, they tend to go up most of the time. We’re talking about a roughly 70% probability for stocks in any given year, and even higher for real estate, given it is a more stable asset class.

Hence, if you have too much of your net worth in cash, over time, you will likely fall behind others who invest more of their cash in risk assets.

There might be periods when money market funds, where you can safely store your cash, provide high interest rates. However, rates for money market funds reflect the interest rate and inflationary environment. When holding cash in a money market fund, it’s important to calculate the real interest rate (nominal interest rate minus inflation).

2) Too Much Temptation to Spend Cash Frivolously on Things You Don’t Need

If you suddenly come into a $100,000+ windfall, you might be tempted to buy a lot of stuff that doesn’t boost your wealth.

You might buy an $80,000 luxury automobile when a $25,000 one would do. Maybe you’ll be tempted to buy a $22,000 Rolex Stainless Steel Daytona when your iPhone will suffice. Or perhaps you’ll violate my vacation spending guide and splurge on a two-week $30,000 family vacation to Hawaii when you should have just spent $10,000.

It’s easy to say you’ll save or invest the financial windfall, but doing so is much harder than saying so.

There’s a reason why people regularly spend their tax refunds on whatever they want—they see the money as a bonus rather than their own to begin with!

There’s also a reason why the average net worth of a homeowner is much larger than the average net worth of a renter. Forced savings saves homeowners from poor spending habits.

The Buddha said, “Desire is the cause of all suffering.” Once you have a lot of cash, you get to fulfill many desires that may make you poorer rather than richer.

3) It Can Be Extremely Difficult to Invest a Large Amount of Cash

Dollar-cost averaging is one of the best ways to invest for the long term. No matter where the stock market is, you just continue to invest a fixed sum of money at regular intervals. Dollar-cost averaging takes the guesswork out of investment timing.

However, if you come into a large sum of cash, you may have a much harder time investing it than your usual monthly cash flow. This may be especially true if the new cash injection comes from a long-term investment that has done well. The last thing you want to do is reinvest the proceeds and wipe away all your gains from the previous investment!

Since starting Financial Samurai in 2009, I’ve come across and consulted with many individuals who have enormous cash balances—sometimes 30% to 70% of their net worth. When I ask them why they haven’t been investing their cash, they mostly say they don’t know what to invest in. The reality is, they are too fearful of losing their hard-earned money.

I’m used to investing between $5,000 – $20,000 a month for the past 20 years. Hence, investing the $106,000 real estate distribution windfall is more than 5X my normal amount.

Given that the real estate investment was for seven years, I feared giving up the gains quickly in one poor investment. Everything from the stock market to real estate had rebounded from their lows. As a result, I ended up carefully investing between $1,000 – $10,000 on each trade over the next two months.

Some Stock Purchases with My Financial Windfall

Here’s a spreadsheet I downloaded from Fidelity that shows some of the stock purchases I made with the real estate capital distribution. I essentially bought the Vanguard Total Stock Market Index Fund ETF and growth stocks like Amazon, Apple, Nvidia over three months. The last two columns are the number of shares purchased and the share price.

This wasn’t a machine inputting my orders based on some algorithm. It was me, multiple times a week, buying stocks when I thought the timing was opportune. It was both fun and exhausting. Managing your family’s finances can sometimes feel like a full-time job.

If I hadn’t been fearful of losing my money, I would have reinvested the entire $106,000 within a week. However, in investing, you never have full certainty about anything. Instead, you develop an asset allocation framework and an investment thesis. Then, you must have the courage to take action and invest accordingly.

Thoughts On Why I Purchased These Stocks

VTI is my default stock investment in this taxable portfolio when I can’t think of anything else to buy. I use VTI to build public stock exposure, which declined post house purchase.

Apple is a stock I’ve held for more than 12 years, and I keep on buying it. I bought more before their developer’s conference given I believe Apple will be a big winner in artificial intelligence. I believe the upgrade cycle for its iPhone 16 will be stronger-than-expected given the 16 is required to run Apple Intelligence on mobile.

I’ve also owned Amazon for more than 12 years and accumulated more shares because it has been lagging its other big tech competitors this year. Funny enough, I actually just met their CEO, Andy Jassy at a party the other week and thanked him for his service.

I’ve held Tesla since 2016, but sold a lot in 2023 to help buy my house. So, I’m just rebuilding the position after the sell-off. EV competition is fierce, but I think Tesla will come out with successful new models and get re-rated for its other businesses.

Gradually Building More AI Exposure

For the past two years, I’ve also been building more exposure to public artificial intelligence companies, hence why I purchased Nvidia. I’m also building a significant position in private AI companies because companies are staying private for longer, thereby more gains accrue to the private investor.

The easiest way I’m building more direct private AI company exposure is through the Fundrise venture product. So far, I have invested $143,000 in the product with a target allocation of $200,000. It’s easy to dollar-cost average in because the minimum is only $10.

Now I’ve just got a hope that these investments do well over the long term. Surely, there will be corrections ahead. However, I plan to hold these latest investments for years. I also plan to buy the dips.

As always, there are no guarantees when it comes to investing in risk assets. Please do your due diligence, and only invest in what you can afford to lose. These are my investment decisions based on my financial situation and risk tolerance, not recommendations for you.

Without Much Cash, You Must Focus on Your Finances

One of the most important implications of having less passive income is that I am forced to keep track of all our household’s finances more carefully. This largely means monitoring our cash flow, reducing expenses, anticipating future capital calls, investing more intentionally, and assessing our risk exposure.

Without a large amount of cash sitting in my checking account or money market fund, I’m also much more motivated to make more money actively and through investments. As a result, being cash-strapped can actually make you wealthier. You can’t afford to be lazy or miss something without a large financial buffer.

During my liquidity crunch, I checked my Empower account at least twice a day, compared to once a week in the past. In retrospect, this was a good thing, as my net worth composition changed significantly after the house purchase.

As your cash pile increases, that motivation to work hard and invest wisely tends to dissipate. Because, why bother when you don’t have to, right? If you are parent, it may be detrimental to your child’s self motivation to give them a lot of money.

Make Your Cash Harder to Spend

If you want to protect yourself from yourself and increase your chances of growing your wealth, keep the least amount of cash possible in your main checking account. Have just enough to cover your regularly expenses.

Transfer as much of your cash as possible to your brokerage account and invest it. This way, it’s a little harder to access for unnecessary spending. You can also diversify your cash into other investments like private real estate and venture capital, which makes accessing your cash even harder.

My private real estate investment from 2017 saved me in 2024. I expect my many other private real estate investments from the past will save me in the future as well because I’ve continuously invested most of our free cash flow each year.

Having cash is nice. But after having about six months of living expenses in cash, you should seriously consider investing it. Your future self will thank you.

Reader Questions

Ever spend a large cash windfall on frivolous things? If so, what did you end up buying? How else can having a lot of cash potentially make you poorer? What is your ideal average cash balance?

Diversify your investments with Fundrise, my favorite platform for private real estate investing. Managing over $3.3 billion, Fundrise focuses on the Sunbelt region where valuations are lower and yields are higher. Invest your cash if you believe mortgage rates will drop and there’s a long-term shift toward lower-cost areas.

As always, past performance is no guarantee of future results. Invest only what you can afford to lose and won’t need. Fundrise is a sponsor of Financial Samurai, and Financial Samurai is an investor in Fundrise. Our views on both real estate and AI are aligned.