Cash reserves hit new records but avoid the traps

Why holding too much cash could burn a hole in your investment returns

Monthly data just released by the Australian Prudential Regulation Authority (APRA) shows households across the nation are now holding record levels of cash.

APRA’s data shows the amount of cash held in authorised deposit-taking institutions (ADI) such as banks 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.

Although the growth rate has not been quite as pronounced, the amount of cash being held by self managed superannuation funds has also been growing steadily this year, reaching a record $170.6 billion at the end of June from $168.8 billion at the end of 2024, according to Australian Tax Office data.

And, according to separate data from the Reserve Bank of Australia, the weighted average interest rate being paid on all term deposits up to $10,000 was 2.85% per annum at the end of August – which compares with 3.35% at the end of last year.

The same RBA data shows the weighted average rates paid on term deposits has been 1.89% since the start of 2020.

How safe is cash?

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

The Financial Claims Scheme (FCS), administered by APRA, is an Australian Government scheme that provides up to $250,000 in protection per deposit account holder with an Australian ADI in the event the financial institution fails.

That protection is important however, when it comes to investing for long-term growth, cash has delivered lower returns than other asset classes over time.

This is illustrated in the recently released 2025 Vanguard Index Chart, which shows cash returned an average of 4.1% per annum over the 30 years from July 1, 1995 to June 30, 2025 – the lowest return among all major asset classes.

This compared with an average annual return of 10.8% from U.S. shares, 9.3% from Australian shares, and 8.3% from international shares. Australian bonds returned an average of 5.5% per annum. 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 primary reasons cash is often considered a poor long-term investment is inflation. Inflation refers to the general increase in prices over time, which erodes the purchasing power of money.

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. While your account balance remains the same, its real value decreases.

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 not ideal for long-term financial goals such as retirement or saving to buy a home.

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.

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.

The income road ahead for many people needing to generate income from their savings may become increasingly challenging as interest rates continue to fall.

Source: October 2025

This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™

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Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the licensee or any of the Infinity group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. Before making a decision to acquire a financial product, you should obtain and read the product disclosure statement (pds) relating to that product. Past performance is not a reliable guide to future returns. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue.