How Much Cash Should You Hold Now?

Deciding how much cash to keep in your investment portfolio depends on several factors, including your financial situation, goals, time horizon, risk tolerance, and funding level. While there is no one-size-fits-all answer, a general rule of thumb is to hold between 2% and 10% of your portfolio in cash and cash equivalents, such as savings and money market accounts. This range can vary depending on individual circumstances, with some experts recommending at least 15% of your income for investments.

Cash and cash equivalents offer liquidity, portfolio stability, and emergency funds. They are also relatively safe and stable investments, providing peace of mind, especially for retirees or those with lower risk tolerance. However, one of the downsides of holding too much cash is the potential opportunity cost of missing out on market gains and the long-term impact of inflation.

Therefore, it is essential to strike a balance and consider your unique financial situation when determining the ideal cash allocation for your investment portfolio.

How much cash should I keep in my wallet?

How much cash you should keep in your wallet depends on a variety of factors, including your spending habits, risk tolerance, and financial goals.

How Much Cash to Carry in Your Wallet

It is recommended to keep at least a day's worth of expenses in cash, which can vary depending on your daily spending habits. This includes commuting expenses such as highway tolls or parking fees, as well as social events where you may need to pay for a meal or tip a service provider. In addition, some businesses, such as convenience stores or coffee shops, may operate as cash-only or may not accept certain credit cards.

Advantages of Carrying Cash

Carrying cash can provide several benefits. Firstly, it can help you better manage your spending as you physically count out the cash for a transaction. Secondly, cash can be a reliable backup in case of emergencies, such as when a vendor doesn't accept credit cards or when there is an issue with card readers. Additionally, carrying cash can be useful when shopping at local businesses that prefer cash to avoid transaction fees.

Determining the Amount of Cash to Carry

While there is no one-size-fits-all answer, most recommendations range from $20 to $100 in your wallet. This amount can be adjusted based on your spending habits and comfort level. If you tend to spend cash freely, you may want to carry a smaller amount, such as $40 to $50. On the other hand, if you have a higher risk tolerance and are disciplined with your spending, you could consider carrying up to $100.

Storing Cash in Other Places

Apart from your wallet, it is a good idea to keep a reserve of cash in a safe place at home, such as a safe. This can be useful for emergencies and can be easily accessed when needed. Additionally, some people choose to keep smaller amounts of cash, such as $20 bills, in various accessible locations like their car or bicycle for unexpected expenses.

In summary, the amount of cash you should keep in your wallet depends on your personal financial situation and spending habits. It is generally recommended to carry at least a day's worth of expenses, with most people suggesting amounts between $20 and $100. Adjust this amount based on your comfort level and spending habits, and consider storing additional cash in secure locations for emergencies.

How much cash should I keep in my bank account?

The amount of cash you should keep in your bank account depends on your financial situation, goals, time horizon, risk tolerance, and funding level.

Financial Situation

Firstly, you should ensure you have enough funds to cover your regular monthly bills and expenses, as well as some extra for an emergency fund. This emergency fund should be easily accessible and provide a buffer for unexpected costs. Most financial experts recommend having the equivalent of three to six months' worth of essential expenses or income in an emergency fund.

Goals and Time Horizon

The amount of cash you keep in your bank account should also be guided by your financial goals and the time horizon for achieving them. For example, if you are saving for a down payment on a home in the next 18 months, you may opt to hold more cash in your account. Conversely, if you are investing for retirement and have a longer time horizon, you may choose to hold less cash.

Risk Tolerance and Funding Level

Your risk tolerance and funding level will also influence the amount of cash you keep in your bank account. If you have a low-risk tolerance, you may prefer to hold more cash, whereas if you have a higher risk tolerance, you may be comfortable with a smaller cash position and invest more in stocks or bonds. Similarly, if you have a low funding level and your portfolio balance is below your target, you may be less likely to allocate cash, instead investing in higher-risk assets to aim for higher returns.

Other Considerations

In addition to the cash in your bank account, it is recommended to keep some physical cash on hand. This includes having between $100 and $300 in your wallet and about $1,000 in a safe at home for unexpected expenses.

It is also important to regularly review and adjust your cash holdings as your financial situation, goals, and market conditions evolve.

How much cash should I keep in a safe at home?

Keeping cash at home can be useful in emergency situations, such as natural disasters, when you may not be able to access your bank account or digital payment methods. However, it's important to weigh the risks and benefits of storing cash at home and to consider the amount you need for your specific circumstances.

Financial experts recommend keeping at least enough cash to cover a day's worth of essential expenses, but some suggest keeping enough for up to two months of basic necessities. This will depend on your personal situation, including the size of your household, the cost of living in your area, and any other specific expenses you may need to cover.

The Benefits of Keeping Cash at Home

• Emergency Preparedness: In the event of a natural disaster, power outage, or other unforeseen circumstances, having cash on hand can be crucial when credit cards are not accepted or ATMs are inaccessible.
• Financial Privacy: In an era of data breaches and hacking threats, keeping some finances private and offline can be important to some individuals.
• Banking System Failures: While rare, there is a chance of banks failing or experiencing technical issues, as seen during the Silicon Valley bank crash, making it difficult to access your funds.

The Risks of Keeping Cash at Home

• Security Risks: Cash is a tempting target for thieves, and in the event of theft or loss, it is unlikely to be recovered or reimbursed.
• No Interest Earnings: Cash kept at home does not earn any interest, unlike money kept in savings accounts, resulting in a loss of potential income over time.
• Inflation Risk: The purchasing power of cash decreases over time due to inflation, meaning your cash will be worth less in the future.
• Deterioration and Damage: Paper currency is susceptible to deterioration and damage from factors like moisture, mould, rot, and fire.

Best Practices for Storing Cash at Home

• Use a Safe: Store your cash in a locked, fireproof, and waterproof safe, along with other valuables and important documents.
• Discretion: Keep your cash in a discreet location to reduce the likelihood of theft.
• Diversify: Consider keeping smaller amounts of cash in multiple secure locations within your home to reduce the risk of losing it all in one incident.
• Regularly Assess Your Needs: The amount of cash you need may change over time, so periodically evaluate your circumstances to ensure you have an appropriate amount.

Alternatives to Keeping Cash at Home

While keeping some cash at home can be prudent, there are alternatives to consider for emergency funds:

• Diversify Bank Accounts: Open accounts at multiple banks or credit unions to diversify your cash holdings and ensure access even if one institution is affected by an outage or failure.
• High-Yield Savings Accounts: Take advantage of the current high savings account yields to keep your money growing at a higher rate while maintaining easy access to your funds.
• Prepaid Cards: Load funds onto a prepaid debit card to ensure access to cash in an emergency while reducing the amount of physical cash in your home.
• Digital Payment Platforms: Services like PayPal, Venmo, and CashApp provide convenient and secure ways to access and send money without relying solely on physical cash.

In conclusion, while keeping some cash at home can be sensible for emergency preparedness, it's important to find a balance between accessibility and security. Assess your unique circumstances, including your financial goals, risk tolerance, and time horizon, to determine the right amount for your needs.

How much cash should I keep in my business?

The amount of cash a business should keep on hand depends on several factors. Most financial experts recommend keeping three to six months' worth of operating expenses in reserve. However, this rule of thumb may not apply to every business or situation.

• Historical Cash Usage: Review your monthly cash flow reports to understand the cash received from sales and the cash spent. This data provides a historical and seasonal perspective to guide your decision-making.
• Business Stage and Revenue Collection: Consider the stage of your business and how you collect revenue. Startups, for instance, often deal with negative cash flow due to initial costs, requiring external funding. As your business grows, your cash needs may increase to support expanding sales and inventory.
• Future Cash Usage: Routinely forecast your sales, revenue, and expenses for the next 12 to 15 months. While fixed expenses like payroll and rent are usually consistent, variable costs like raw materials can be harder to predict. Make conservative projections to account for potential deviations from expectations.
• Business Stage and Goals: Evaluate the stage of your business and your short-term and long-term goals. A startup, for example, may have different cash requirements compared to an established business. Additionally, consider whether you plan to grow, make large purchases, or have specific financial targets.
• Timing of Additional Cash: It is generally recommended to seek additional cash when you don't urgently need it. This allows you to negotiate from a position of strength and explore various funding options without desperation.
• Avoid Under or Overcapitalization: Undercapitalization refers to not having enough cash to meet obligations or grow your business. On the other hand, overcapitalization can stifle growth if idle money is not invested in expansion or other ventures.
• Emergency Funds: Ensure you have sufficient cash set aside to cover unexpected expenses or financial shocks. This emergency fund should be easily accessible and provide a buffer during challenging times.

By considering these factors, you can make informed decisions about cash management and ensure your business has the necessary funds to operate effectively, invest in growth opportunities, and navigate unforeseen circumstances.

How much cash should I take when travelling?

When deciding how much cash to take on holiday, it's important to research your destination. In some countries, it's harder to pay with debit or credit cards. Small, independent retailers may add on service charges for card payments, making items more expensive than if paid for in cash. It's also worth finding out whether your card company will add a tax for purchases abroad. If so, you may prefer to save your card for emergencies only.

It's a good idea to make a budget for your trip. As a rough guide, $50-100 per person per day should cover accommodation, food, drink and transportation costs. This number can vary depending on your destination and travel style.

If you're travelling overland between countries, especially in Africa and Southeast Asia, you may need cash to pay for visa fees. It's also a good idea to keep some cash set aside for airport transfers or taxis at the end of your trip.

If your destination is card-friendly, you may only need to bring $200 to $500 for emergency use only. Split this cash and keep it in different spots in your luggage in case you lose your luggage or are robbed. Take two cards if possible, in case one gets lost or doesn't work.

Frequently asked questions