Clients ask us this all the time: How much cash should I keep in the bank?
There’s no one-size-fits-all answer—because the real question is about security, flexibility, and peace of mind. That said, a good place to start is the standard guideline: keep three to six months’ worth of expenses in an emergency fund, held somewhere easily accessible, like a high-yield savings account.
The three most common reasons clients are holding onto cash in their savings accounts are as an emergency fund, because they got an unexpected infusion of funds and weren’t sure what to do with it, or they have a number in mind that they need to sleep well at night. In that last case, the cash is providing emotional security.
Balancing Risk and Return with Cash
High net worth investors should think about cash as a tool. If you’re holding more cash in savings than you need for an emergency fund without a clear purpose, it may be more than necessary. It’s easy to miss out on potential returns by letting cash sit in a checking account. Risk and return are related; while money in cash might be best used for a short-term goal, there may still be an opportunity to optimize returns on less risky holdings. Your financial advisor can help you find the best option for your individual situation.
If you have too little cash, you’ll see the signs. If you’re carrying a balance on your credit card, it’s probably in your best interest to get a little more liquidity to avoid high interest payments.
At the end of the day, you should ask yourself if your money working as hard for you as it should.
Emergency Funds: Checking vs. Savings
Clients are sometimes tempted to keep their emergency funds in their checking accounts for easy access. We could list a lot of reasons we don’t advise doing that, but the simplest is because of fraud. Most checking accounts have a debit card tied to them, and if the number gets stolen, the account could be drained. While the money may be replaced in your account, your financial institution’s investigation may take time. Having it in a savings account can provide peace of mind that the money will be there when you need it, just one easy transfer away.
Related: How much do I need for retirement?
How Much Should Be in my Emergency Fund?
As a simple rule of thumb, most people should keep at least $10,000 in an emergency fund separate from the cash they use for monthly expenses in a checking account. If you anticipate dipping below that level, it’s worth planning ahead by securing other sources of liquidity, such as a line of credit or a home equity loan you can access if needed.
At the end of the day, financial planning is as much about your heart as your head. When the goal is peace of mind and building a life you don’t feel the need to escape, your strategy should reflect what truly matters to you.
Ready to feel more peace of mind?
We’d love to chat with you about becoming your financial advisor. Feel free to reach out to us today!
