How much cash should I have?

I wish there was a simple answer like $3K or $10K yet as with most things in life, it depends.

Cash does not earn much interest. Yet you need the “safe” money – let’s look at the places where you might put this money.

Emergency fund:

Look to save the amount that could cover 3-6 months of your living expenses. This will secure you from the unexpected events like loss of a job. Most people are comfortable that within 3-6 months time-frame they will be able to re-group and replace the lost income. Some, though, would go with as much as 6-12 months of living expenses to guarantee a piece of mind.

What to include in the calculation of the living expenses? Consider the following:

  • Housing – monthly rent or mortgage payments, utilities, condo fees
  • Health care – health insurance premiums (mind that unless both yourself and your spouse have access to employer-sponsored health insurance, with the loss of a job, your health insurance premiums might go up) and out of pocket expenses
  • Taxes and insurance – property taxes, homeowner insurance, life, vehicle and other insurance you consider essential
  • Food – essential grocery shopping (not including dining out that you can probably cut in the dire times)
  • Childcare – consider expenses that you will not be able to cut should something happen (for example, if you have a babysitter, you might be able to reduce the hours should you lose a job)
  • Essential transportation – car lease payments, gas
  • Debt – any other monthly debt payment obligations

You do not need an exact number up to a penny. In most cases you can do a ballpark estimate by looking at your last several credit card statements and highlighting the items that are essential. You should then add the big ticket items that might not go through your credit card (mortgage payments, health care, childcare etc.).

It might be hard to set aside the emergency fund at once – consider a disciplined approach to set aside money from each paycheck. Make an auto-deposit so that you do not need to remember about it every two weeks.

Open a separate account for this purpose – these emergency money should not be commingled with your ordinary checking account where money goes in and out. With “emergency” account you add money until you hit your goal (3-6 months of expenses) and then forget about it. Next time you might look at it is in a year to see whether you need to adjust the amount should your lifestyle change significantly. Not earlier – there are much more interesting things you can do with your time.

Unplanned expenses:

Have you been invited to a wedding? Or a trip with the friends? Or maybe kiddies ruin your favorite sofa or your car begs for a visit to a repair shop? It’s a good practice to set aside some money for random expenses so that you do not tap into your emergency fund or your investments.

Monthly expenses:

These are the essential expenses listed before – the majority of them likely go through your credit car or recurring auto-debits. It’s a good practice to constantly have a balance on your checking account so that you do not get caught by surprise or go into an overdraft once the auto-payments are made. For most, this will not exceed $2-3K for a single person or $5-7K for a family.

Short-term goals:

You might look to buy a house in the next 1-3 years and need to save money for the down payment. If that’s the case – open a separate high-yielding savings account or a high-yielding CD.  Automate your deposits towards that goal.

You see that there is not one number and it takes some work to sort out how much cash you should have in your circumstances. Yet the good news is that once you do it – you can put the rest of your savings to work, investing for your medium and long-term goals such as sending kids to college or building a retirement nest.