Using Your Cash Wisely

By Scott Thoma June 13, 2018

How much cash do you usually have on hand? We’re not talking about just the amount in your wallet – it’s important to keep some cash in reserve to cover your everyday spending needs as well as the inevitable “rainy day.” Or maybe you’ve been setting aside some money to pay for your summertime fun.

But having too much of your savings sitting in cash can be an issue, especially when you consider a long-term goal such as retirement. The recent rise in interest rates, particularly short-term rates, may provide an opportunity for your excess cash – so knowing how much cash is appropriate is important. 

How much cash is too much?

To help you determine this, we like to use the acronym USES:

  • Unexpected expenses and emergencies – such as a job loss, a home repair or an unplanned medical expense. We generally recommend about three to six months of living expenses in cash to cover emergencies.
  • Specific short-term savings goal – this is usually something that will occur within the next year or so, such as that summer vacation, so the amount you may need would be specific to that goal.
  • Everyday spending – such as groceries, utilities, entertainment and a mortgage or rent payment. We generally recommend having about one to two months of cash for these needs while you are working, as they would be replenished by your paycheck. After you’ve retired, we recommend having about a year’s worth of income needs from your portfolio in cash. 
  • Source of investment – you’ll want some cash on hand to take advantage of investment opportunities as they arise. Anything not used for the other USES is a source for investment, and we recommend up to 10% of your fixed-income allocation in your portfolio in cash. 

By viewing your cash based on its USES, you can:

  • Be confident you have enough cash on hand to meet your day-today living expenses as well as for the unexpected
  • Provide a cushion for your spending needs and emergencies to help avoid selling longer-term investments during a market decline
  • Determine the cash that can be used as a source of investment for your long-term goals.

Focus on growth

When the market declines or becomes more volatile, like we saw earlier this year, some investors may be tempted to move to cash, thinking they can avoid the risks associated with a market downturn. But Edward Jones believes there are risks to not investing. In fact, the biggest risk you could face is the possibility of not reaching your long-term goals.

So while you’ll want to ensure you have enough cash to cover each of your USES areas, you’ll also want to focus on the growth necessary to help achieve those goals, and as we noted earlier, there may be opportunities, particularly with the rise in short-term interest rates, to invest some of this excess cash.

We recommend you partner with your financial advisor for a review of your entire financial picture. Once you’ve ensured your USES areas are covered, you can better focus on your longer-term goals, including preparing for retirement.

Important Information:

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.

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