How safe is cash?

In Australia, as in many countries, cash is viewed as a safe and reliable way to store wealth.

In fact, data released by the Australian Prudential Regulation Authority (APRA) in August 2025 showed Australian households holding record levels of cash.

APRA’s data showed the amount of cash held in authorised deposit-taking institutions (such as banks, building societies and credit unions) rose to $1.65 trillion by the end of August from the $1.57 trillion at the end of 2024 – an increase of $80 billion, or 5.10%, over just eight months.

^{Source: APRA, Monthly authorised deposit-taking institution statistics, August 2025 (released 30 September 2025).}

The safety and protection of cash has a price

Asset classes are often described as being either ‘growth’ or ‘defensive’.

Cash is widely considered the most ‘defensive’ of defensive assets. Cash investments are very safe, and the returns are typically very steady. And cash investments are generally cheap to make (especially when compared to other assets such as property and shares).

However, when it comes to investing for long term growth, cash has delivered lower returns than all the major asset classes over time. This is by and large the case even when investment costs are taken into account.

This is illustrated in the 2025 Vanguard Index Chart, which shows cash returned an average of 4.1% pa over the 30 years from 1 July 1995 to 30 June 2025.

This compares with an average return of 10.8% pa from US shares, 9.3% pa from Australian shares, and 8.3% pa from international shares. Australian bonds returned an average of 5.5% pa.

Of course, it’s worth keeping in mind that past performance is not a reliable indicator of future results and markets can, and do, change from time to time.

The impact of inflation

One of the main reasons cash is considered a poor long-term investment is inflation. Inflation is the rate at which the price for goods and services rises over time. It means that over time, your purchasing power decreases.

For example, if you keep $10,000 in a savings account earning less than 2% and inflation runs at 3% per year, your money will buy less in the future than it does today. So despite your account earning some interest, its real value has decreased as things have become more expensive.

Opportunity cost

Holding cash can mean missing out on potential gains from other investments. This is known as opportunity cost.

Money kept in cash could be invested elsewhere, potentially earning higher returns. Over time the difference in growth can be significant, especially when compounding is taken into account.

Not suitable for long term goals

While cash is useful for short term needs and emergencies, it is often not ideal for long term financial goals such as retirement.

Investments that offer growth may be better suited for these objectives because they have the potential to outpace inflation and increase in value over time.

When cash makes sense

Despite its drawbacks, cash can play an important role in a diversified portfolio. It can provide liquidity for living costs and unexpected expenses, act as a buffer during market downturns, and help manage risk.

Having said that, shifting in and out of cash to try and avoid market downturns – in other words, trying to time the market – is extremely hard to do.

And while it's important to keep some cash on hand, investors should also consider other asset classes to achieve their financial goals and protect their purchasing power.

Long term performance matters

When considering asset class performance, it’s always best to consider the long term. That especially makes sense in relation to superannuation which can be an investment held for many years, and possibly decades.

Turning our minds back to the 2025 Vanguard Index Chart, we can see how $10,000 invested in different asset classes would have grown over a 30-year period (from 1 July 1995 to 30 June 2025).

The results speak for themselves:

How too much cash can hurt your retirement prospects