On the one hand, you want to have enough cash that you can pay your bills and cover your emergencies. On the other, you don’t want to keep too much in cash and risk missing out on investment returns.
Ask anyone the question, “How much cash should I have?” and every person is going to have a different opinion. Really, it is all going to depend on your own personal financial goals and needs.
Although exactly how much cash you should keep around will depend on your goals, every single person should consider saving some sort of emergency fund that is easy to access. And cash can be relatively easy to access compared to other assets. Unfortunately, not everyone has one.
According to a survey by GOBankingRates, 69% of people had less than $1,000 in a savings account, 34% of whom have zero dollars in savings. This is a dire statistic, but it’s never too late to get started.
One possible way to get started on building a cash reserve is by reviewing your budget to see if there are any obvious places where you can pare back spending. Then, you could set yourself a cash savings goal.
When setting your cash savings goal, it helps to know the answer to the question, “How much cash should I have on hand?” Below, we will discuss the different methods of determining how much to keep in cash, whether you’re just getting started or you’re worried that you have too much sitting in cash.
How Much Cash Should I Have?
How much money you need to keep in cash depends on your financial needs and goals, which we’ll cover in the next section. For now, let’s think about your checking account and emergency fund.
Before you know how much you need for emergencies, you might want to figure out your approximate monthly expenses. To do this, you could look back at your spending over the last six months.
At a bare minimum, consider keeping one month of expenses in your checking account, along with a buffer for expenses that happen less than monthly (such as a bi-annual car insurance payment) or maybe even a small money emergency.
Some people may prefer to keep two or three months of spending in their checking account, and that’s fine too, especially if you have a lot of irregular expenses.
Much of the talk about how much you need to keep in cash at all times is referring to an emergency fund. This should be money that you have easy access to in the event that you have, well, an emergency.
This could include replacing a car part, paying for a health emergency, or any other unplanned expense. An emergency fund can also be your first line of defense in the event that you are laid off from your job.
Without an emergency fund during times of unemployment, someone may end up relying on high-interest credit cards. Racking up hundreds or even thousands in credit card debt after a layoff can be incredibly difficult to pay off and come back from. Emergency funds can help stem the problem before it starts.
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Now that we all agree on the importance of an emergency fund, the next step is to determine the size of the proper emergency fund. Of course, there are some varying opinions on this, as well. Common knowledge is to have you should have at least three months of expenses set aside in cash. That said, start with anything, and work up to a small goal, like $100, or $1,000, or whatever the cost of your health insurance deductible.
On the higher end, you could have six months or a year of expenses set aside in cash. Exactly how much money you’ll want in your emergency fund depends on—you guessed it—your personal financial situation.
For example, if you have children, you may want a larger emergency fund. If you work in an industry that is notoriously difficult to find work in, meaning that it could take you longer than six months to find a new job in the event of a job layoff, you may want more cash in your emergency fund.
How Much Cash Should I Keep In Addition To My Emergency Fund?
For everyone asking themselves, “How much cash should I have on hand, aside from my emergency money?” let’s talk about what comes next and how to plan for it.
You could start by listing out each of your financial needs and goals, and how much each of these goals will cost. Next, determine whether these goals are short, medium, or long-term goals. This step is important because it will help you decide whether that money should be kept in cash or invested another way.
In general, goals that are short-term in nature should be kept in cash. This is because in the short-term, the biggest risk you take is subjecting your money to the volatility of non-cash investments.
Investments such as stocks and bonds (including stock and bond mutual funds) could dip in value at any time. Therefore, you likely won’t want to invest the money that you have plans to use, or could potentially need to use, in the near-term future.
What is the short-term? Well, short-term should definitely include any money that you want to use in the next year or two. (Even if you don’t end up using your emergency fund in the next year, the whole point is having the option to do so.) Some people might even consider five or even 10 years as a short-term time frame. Really, it all depends on the goals and how much risk you want to take with that particular “pool” of money, knowing that investments with potential upside come with the possibility for downside as well.
For mid-term and longer-term goals, a person might want to consider investing the money. That’s because there’s also a risk in keeping too much cash. Why is that? Due to the effects of inflation , which are steadily rising prices over time, the cash you hold actually loses value each year.
Ever notice how most things for sale in the world gets a little more expensive each year? Blame inflation. This economic effect means that your cash can buy you less and less each year.
What’s the antidote to this problem? Well, most people would only want to keep in cash what they may need in the short-term. The rest of the money gets invested in asset classes that may have a better chance of keeping up with inflation.
Generally, people only take on investment risk in an asset class like stocks using money they won’t need to access for a very long time, due to their volatile short-term nature. It is helpful to remember that risk and return are two sides to the same coin, and that you cannot have one without the other. If an investment can go up in value, it can also go down.
Where Should I Store My Cash?
You might consider keeping day-to-day money in a checking account, and emergency money in a separate savings account. That way you don’t need to battle the constant temptation to spend it.
SoFi Money® is one such cash management account that charges no account fees (subject to change). With SoFi Money, you can access the money immediately, which could make it a useful place to store your emergency fund.
And if you haven’t started saving yet, opening a new SoFi Money cash management account could help jumpstart that saving. Good luck and happy saving.
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