The Four USES of Cash

By Scott Thoma April 18, 2018

Woman paying for merchandise

It’s important to have cash available for everyday spending needs as well as for the inevitable “rainy day.” However, many of us have never taken the time to understand how much we really need.

And while it may seem like a good problem to have, having too much of your savings sitting in cash can be an issue, especially when you are investing for long-term goals such as retirement. To determine the role of cash in your financial life and how much you should have, we use the acronym “USES”:

  1. Unexpected expenses and emergencies – cash used for situations such as a job loss, a home repair or an unplanned medical expense
  2. Specific short-term savings goal – cash dedicated for a goal that will occur within the next year or so, such as a wedding or vacation
  3. Everyday spending – cash used to pay for day-to-day spending needs such as groceries, utilities, entertainment and your mortgage/debt payments
  4. Source of investment – cash used as an asset class and as a source for investment opportunities

The priority of each of these pieces may change depending on your goals and objectives. For example, if you’re just starting your career, you may find that building an emergency fund may be the biggest priority. If you’re retired, your first goal may be to ensure you have enough for your everyday spending.


The risk of not investing

Some people hold too much in cash, viewing it as a safe haven against the risk of a market decline. But cash is not risk-free – there are also risks to not investing. In fact, the biggest risk you face isn’t a temporary pullback in the market – it’s the possibility of not reaching your long-term goals.

By ensuring you have each of the USES areas covered, you can better focus on your longer-term goals, including preparing for retirement and paying for education. Schedule some time now with your financial advisor to review your USES of cash. If you have your cash needs covered as outlined in the USES framework, then it’s important to focus on the growth necessary to help achieve your long-term investment goals.

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