Cash

Cash

January 15, 2024

There is an old saying, “Cash is king”. Cash is a very important asset class but unfortunately also one that I feel is often mis-used by many people. In my experience, the two most common errors that I see for cash utilization are at opposite ends of the spectrum. These occur when someone holds on to too much cash which is an inefficient use of assets, or alternatively, when someone is not holding enough cash for their financial situation. I believe that a proper savings account is the foundation of your financial life and it is the first thing that should be addressed, even before investing and saving for longer-term goals.

What is proper amount of cash to hold? There is no universally perfect answer but there are some basic rules of thumb to follow. I believe that a person/household in their working years should have 6-12 months of their living expenses in cash at all times in their savings account. There are variables that effect this range and can even cause some deviation outside of that range, but I feel that is a really good starting point. For someone in their retirement years, this range changes to 12-24 months’ worth of expenses. This account can help to cover a short-notice emergency and also potentially provide valuable peace of mind when things in the markets, politics or personal factors get turbulent. Holding too much cash can be an inefficient use of assets since there is an opportunity cost of potential higher returns with other uses of your funds. Not holding enough cash is dangerous in the event of needing liquidity during an unforeseen emergency.

As for where to keep your cash, I recommend that cash is kept in a High Interest Savings account that is FDIC insured. These accounts are available through several avenues and the interest earned on these accounts can be substantially higher than is typically offered by the commonly used savings account. As long as the balance stays below the FDIC insured limit, there is confidence in the safety of your funds.