What’s the Appropriate Amount of Cash to Have in Savings?
Is it really possible to have too much cash in savings? Sounds like a good problem to have, right? As a reminder, the core tenet of personal finance is to spend less than you earn. Period. The next piece of the puzzle is to save or invest the difference between those two numbers. But just how much should you put aside in cash? It depends.
Saving and investing are two very different things, each dictated by the amount of time between now and when you expect to need the money. If you are setting money aside for a purchase in the next few years, you need to be certain that the money is there for you. As such, keeping it in cash, or at least in very low-risk investments, is the right move. Investing in the stock market carries inherently more risk, but this is the place for your money if you don’t anticipate needing it for at least 10 years from now. A longer time horizon gives your money a better chance of making it through the ups and downs of the stock market intact.
But back to the cash. Now, more than ever, the adage still rings true: cash is king. It is important for us to have cash readily available for the unforeseen situations that arise in life; things like health emergencies, car repairs, job loss, etc. Everywhere you turn, however, you hear a different number for how large this stash of cash should be. Is it an even $1,000? Maybe it’s 3 to 6 months’ worth of living expenses. Do you need 8 months’ worth? A year’s worth? More is always better, right? Not necessarily.
Too little cash available and you won’t be adequately prepared for one of the aforementioned emergencies. Too much cash set aside and you’re potentially missing out on investment gains in stocks while your cash loses value to inflation. So, if Goldilocks had three piles of cash in front of her, what would she say is “just right?”
The answer is whatever amount allows you to sleep well at night. I’ve said before that personal finance is personal. Sure, the experts can look at the numbers and tell us that we’re crazy to play it too safely. “Look at past history,” they say. “You might be missing out on an amazing investment opportunity if you don’t buy into the market right now!” There may be plenty of data to support their views but the experts you see on TV and read in print aren’t necessarily experts about your particular situation. Money is not a black and white subject. Our emotions and tolerance for risk create a thousand shades of grey.
If you set aside one of the recommended amounts but still don’t feel comfortable, keep on stockpiling. Who cares if you miss out on a market rally? The stock market rises and falls at regular intervals, so you’ll have plenty of chances again in the future. There are, after all, more important things than the rate of return on your portfolio — namely your sanity and well-being. Your goals and priorities are yours, and yours alone. Manage your cash to account for your own unique situation and don’t worry about everything you hear. If coronavirus has taught us anything, it’s that you can’t be too prepared.
The overall goal in my home is flexibility, opportunity, and freedom so we’re taking this opportunity to re-evaluate our own situation and how much of a buffer we’d like to have. And maybe now is the time for you to revisit your own goals. If you need to save two years’ worth of expenses, then go for it. If you need to redirect some of your money away from investing or extra debt payments for a little while to build up your emergency cushion, then do what you need to do. Whatever you decide, go with your gut and stick with it.
