21 September 2022
Hey Business lady,
We are currently experiencing some economic difficulties. On the one hand, inflation is climbing and has been for some time. Then, on the other hand, even when the economy is relatively calm, it’s a good idea to make sure you’re not keeping too much (or too little) money in cash, but this is especially important now.
What does it mean to keep cash on hand?
In the world of personal finance, “cash” does not always refer to physical cash that you can hold in your hand (or hide under your mattress, stash in the cookie jar, etc). Instead, it usually simply means that the money is in your checking or savings account.
The purpose of keeping your money in cash is to ensure stability and liquidity. So the bank accounts you select should be NCUA- or FDIC-insured (most are, but with the rise of digital banks, double-check) and allow you to withdraw or transfer funds quickly and easily.
What difference does it make how much money you keep in cash?
You should keep some cash on hand because it provides financial stability. If you have insufficient funds, you may find yourself in a difficult situation if you lose your job or if an emergency arises. However, there are some compelling reasons to avoid carrying too much cash.
Inflation reduces your purchasing power, or the value of any money you hold in cash.
So, how much cash should you keep on hand?
The exact amount will vary depending on who you ask, but it is the sum of 3 factors:
1) The funds used to pay your bills. This one is simple: money for daily living expenses should be kept in the bank.
2) Your emergency savings account. Seriously. Maintain it in cash. The precise amount you require will vary, but we typically recommend aiming for three to six months’ worth of take-home pay (or up to nine months’ if self-employed).
3) Any funds required within the next two years. Short-term goals (vacation funds, money for next year’s car insurance, etc.) should also be saved in cash. If the markets continue to fall, one or two years may not be enough time for them to recover. Investing is a long-term game, so it’s best for time horizons greater than two years.
That said, if you’re nearing the end of your long-term investing goal — say, you’ve been saving for a down payment on a house and want to do it next summer — it’s not so clear, especially if you’re not sure you’ll use it that soon. It is up to you and your risk tolerance to decide whether to withdraw it as cash or leave it invested. There’s also the issue of withdrawing your money in general to consider.
When the economic landscape appears uncertain (as it is right now), it is acceptable to — keep a little extra wiggle room in your checking account, beef up your emergency fund a little. But, at its core, the advice is the same.
So channel your mindset and feel good about doing the right thing for “Future You”.
Need some help figuring this out?
Get in touch with me
Yours in Business,