How Much Cash Do Clients Really Need? — Advisors’ Advice

To Fully Invest ...

We recommend clients keep $2,000-$3,000 at home for emergencies, or however much makes them feel comfortable.

Client portfolios stay fully invested. We do not advocate for clients to keep any cash in their portfolios, because keeping cash around leads to long-term cash drag on performance. Having cash is not important, access to cash is important, which is why we encourage each client to set up margin so they can borrow at a moment's notice if/when an emergency strikes.

— Noah Damsky, Marina Wealth Advisors

... Or Not to Fully Invest?

At Home:

We suggest that they not exceed $50K of cash in their house because that is usually the limit covered by insurance in case of a fire, burglary and any other circumstance a house insurance claim would be filed.

In their Portfolio:

We suggest they are NEVER fully invested. Keeping some cash on hand does three things. Mutes volatility, allows for new purchases without selling existing holdings and pays any costs or fees without having to liquiditate to cover those charged by the custodian.

At Banks:

Cash should always be in circulation, meaning that the least amount of cash kept on hand is in your checking, then your savings should be a high-interest-bearing account.

Our level we suggest is two months of expenses in checking and 10 to 12 months worth of income in savings or money market accounts.

— Jon McCardle, president, Summit Financial Group of Indiana

Consider Retirement Status

Cash at home — Needs to cover at least two weeks of expenses. This is in case of an emergency or restricted access to a bank or ATM.

Cash in portfolio — For retirees, one year of living expenses. For non-retirees, 5%-10% cash, a dry powder to find opportunistic investments.

— John Bovard, owner and wealth advisor, Incline Wealth Advisors

Stash in High-Yield Savings

Our recommendation for cash is dependent on the financial situation of an individual or family. As a starting point, we recommend three to six months of expenses are held in a high-yield savings account to serve as an emergency fund. If you own a home and aren't incorporating home upkeep expenses into your regular budget, we’d add 1%-3% of your home’s cost per year into this cash allocation.

Similarly, if you have kids and are relying on a single income for your family, we'd also recommend increasing your cash allocation. We don't believe outright cash should be in a portfolio, but rather an investment in short-term Treasury bonds or CDs if there is cash needed in the next one to two years.

— Stephanie Bucko, co-founder and chief investment officer, Mana Financial Life Design

Limit Cash at Home

We typically wouldn't recommend keeping actual cash at home greater than the amount of cash you expect to need over the next several weeks. In today's economy where cash rarely trades hands this amount is typically very nominal.

The answer for portfolios varies widely depending on individual circumstances.

A younger investor whose employment earnings more than cover their living needs would need a very low cash allocation. They will want to have an emergency fund of several months of living needs.

A retiree should have 12 months of anticipated withdrawals in cash plus an emergency fund — for example if they are withdrawing $5,000/month they should have $60,000 in cash plus an emergency fund they are comfortable with.

A retiree in their 80s or older that has a low risk tolerance often will have an even higher cash allocation. Fortunately, today investors can earn 5% or more with a good money market fund so there is not as much of a penalty to holding cash as in past years.

— Douglas Lynch, president, Lynch Financial Group LLC

Use a Safe

I recommend keeping a good amount of cash at home, such as several hundred to a thousand dollars, for emergency planning purposes. If there were a local or regional disaster and paying with cards or checks wasn’t an option, having cash to be able to buy supplies could be invaluable.

I suggest keeping it in a small fireproof safe, along with other important documents, ready to grab if you need to evacuate the house.

The amount of cash I recommend in a portfolio is less about the percentage, and more about the dollar amount.

It’s good to keep enough cash to weather a job loss happening at the same time as several unexpected expenses. The amount will vary depending on your circumstances; consider the level of your income/expenses and the type of employment you have.

This provides real peace of mind in knowing you’ll be OK if disaster strikes.

— Keith Spencer, owner and financial planner, Spencer Financial Planning LLC

Consider Time Horizon

Dual income household, W-2: Cash reserves should be at least three months. These folks have low debt, low fixed costs, safer jobs.

One-income household: Cash reserves should be at least six months. These people have safer jobs, a family, mortgage, etc.

Business owner: Should have nine to 12 months of reserves to protect against slowdowns, variable income and debt.

As it relates to portfolios, it has everything to do with time horizon. A person with a 10-plus year time horizon should have zero cash and little to no fixed income. These are typically retirement accounts, health savings accounts, early-stage 529 plans.

On the flip side in a nonqualified account, a client should be more moderate and have some cash for opportunities as well as a volatility buffer. These accounts are funding house down payments, new car, wedding, vacations, etc.

— Sean Rawlings, founder and financial planner, WealthBound Advisors

Prepare for Pullbacks

I don't recommend keeping more than $500 in cash at home for emergencies. It's too dangerous and unnecessary to keep more than that.

For investment portfolios I like to keep 5%-10% in cash in order to take advantage of market pullbacks. Emergency funds should be in cash and cash equivalents matching three to six months of necessary living expenses if you have a steady income and nine to 18 months if you have unpredictable income.

— Greg Vojtanek, owner, financial planner, Fade In Financial

Store Emergency Supplies Instead

I recommend clients keep no more than $1,000 cash at home for the simple reason that many insurance policies cover between $200 and $1,000 for stolen cash. Large amounts of cash belong in FDIC bank accounts.

Typically, emergencies exceeding $1,000 can wait for a trip to the bank or ATM. If you insist on having cash in excess of $1,000, be comfortable losing it.

Recently, a relative in Maui couldn't use $500 during the Lahaina fire due to power outages at stores, rendering their cash virtually worthless. Consider stocking up on essential supplies at home rather than hoarding cash in preparation for an emergency.

For portfolios, the cash allocation varies by individual needs but generally, having enough to cover three to six months of living expenses is a good starting point. Some individuals may prefer a 12-month cushion for the simple fact that they can sleep better at night.

— Josh Morin, partner, investment advisor representative, Pacific Asset Management LLC

Remember One-Time Expenses

I usually recommend people keep three to six months' worth of living expenses in cash and cash equivalents. However, it depends. The more variable someone's income and expenses, the more they'll likely need.

Some monthly expenses are easier to estimate than others. Mortgages, utilities and subscriptions are more straightforward than home maintenance, auto insurance and vacations.

One-time expenses also factor into the equation. I typically add large upcoming expenses to the standard three- to six-month emergency fund.

I generally do not recommend clients hold many cash equivalents in their investment accounts. Funds in high-yield savings accounts may earn a higher interest rate and transfer more quickly. Instead, it often makes sense to prioritize growth in tax-deferred and tax-free investment accounts.

— Kevin Estes, founder and financial planner, Scaled Finance

Assess Income Stability

Now that interest rates are at levels where cash investments are paying significant interest, emergency funds are no longer deadweight to one’s overall investments. Having said that, the appropriate level of an emergency fund can vary based on the stability of your income, your risk tolerance and perceived state of the economy.

You can take the golden rule of three to six months of expenses and increase or decrease based on those factors. If you lean conservative, do not have guaranteed income sources and have concerns about the economy, you probably want to have a greater level of cash and cash equivalents.

Likewise, if you lean aggressive, have guaranteed income sources and feel good about the economy, then you can back off the level of cash savings. In general, we keep 1-2% in cash for portfolios, but have increased our near cash equivalents — ultra short duration bonds — when interest rate risk rises.

— Paul Culbreth, principal, Culbreth Wealth Management