How much cash should you have?

We know it’s important to have cash available for our everyday spending needs as well as for the inevitable rainy day. However, many of us haven’t taken the time to understand how much we really need.

Having too much of your savings sitting in cash can be an issue, especially when you’re investing for long-term goals like retirement. Ultimately, your cash strategy can be a key factor in your financial success.

To determine the role of cash in your life and how much you should have, consider the USES acronym:

• Unexpected expenses and emergencies: Cash used for situations like a job loss, a home repair or an unplanned medical expense
• Specific short-term savings goal: Cash dedicated for a goal you want to achieve in the next year or so, such as a wedding or vacation
• Everyday spending: Cash used to provide for your lifestyle, including day-to-day spending needs such as groceries, utilities, entertainment and your mortgage/debt payments
• Source of investment: Cash used as an asset class and as a source for investment opportunities

How much cash should you have?

Cash has benefits and trade-offs. It provides for your current spending needs and can serve as a cushion, but it generally earns a low interest rate, which can make it a poor vehicle to achieve your investment goals.

How much cash you have on hand should also be dictated by your employment status. Pre-retirees who earn a regular paycheck should maintain a different amount than retirees who rely on Social Security and investments. See the breakdown below.

Unexpected expenses and emergencies

Cash for unexpected events and emergencies should be held in easily accessible, principal-protected accounts. Establishing this type of fund can help avoid the need to sell long-term investments, dip into your retirement accounts or take on debt to meet a short-term cash need.

At least three to six months of living expenses

For most people (whether before or during retirement), having three to six months of total expenses in emergency savings is appropriate. The specific amount to target depends partly on your risk of having unexpected expenses and, if working, your risk of a temporary loss in income. Consider insurance coverage (health, home, auto, etc.) you have and how likely you are to use it, unexpected repairs your car or home may need, and your job security.

In addition, think about how much you value the comfort of being able to weather financial emergencies. The greater your risks and the more comfort you want, the more money you should save for emergencies, which could mean maintaining more than six months in emergency cash.

Specific short-term savings goal

Cash earmarked for a specific purchase or goal in the next year or two—vacation, wedding, car, etc. —should be held in one or several of the principal-protected accounts mentioned above. Some people even have dedicated accounts for each short-term goal. For longer-term goals (three to five years or more), consider investments with growth potential instead of keeping the money in cash.

As your financial needs may change, consider working with your financial advisor to estimate the amount you need as well as the appropriate savings vehicle for your unique goals.

Cash for everyday spending

This is the cash used to pay your day-to-day expenses, usually held in a checking or cash management account. To find out how much you need, create a budget to identify areas where you can reduce spending, and determine how much you have available for long-term investments.   

Pre-retirees – One to two months of total expenses

For pre-retirees, everyday cash is replenished every couple of weeks by your paycheck, so having one to two months of total expenses in cash provides for ongoing spending needs. Anything beyond that (and your emergency cash) can be directed to your investment accounts.

Retirees – 12 months of total expenses, minus any amount from outside income sources

It’s important to have about a year’s worth of total expenses in cash, subtracting other income like Social Security or a pension. In addition to your everyday cash, consider a ladder of CDs or other short-term investments that will mature annually over the next three to five years. This could help ensure your near-term expenses are covered and prevent having to sell your long-term investments to provide for your income needs.¹

Source of investment

Cash can play a role as part of a well-diversified investment portfolio. This role is typically one of the following:

Strategic cash allocation

As part of your investment strategy, cash can be a distinct asset class. It tends to behave differently from other asset classes, such as stocks and bonds, and can therefore provide some diversification benefits.

Based on interest rates, the markets and the economy, Edward Jones recommends having about 0%–5% of your overall investment portfolio in cash.

Temporary allocation

You may have cash you have recently deposited in your investment account, or from an investment that has matured that you’re targeting for reinvestment.

This is temporary cash, so it should be invested based on a schedule you’ve established with your financial advisor. One way to take timing out of the equation is through dollar-cost averaging—a strategy designed to help you purchase more shares when prices are low and fewer when prices rise.² It can help smooth out the investment cost and maintain discipline in your investing decisions.

Use your cash wisely

Cash has many uses, whether it’s providing for an unexpected event, achieving a short-term savings goal or paying for everyday expenses. By ensuring you have each of these areas covered, you can better focus on your longer-term goals and set your sights on financial success.