How Much Cash Do You Really Need?

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

One of the most basic, yet complicated concepts of personal finance is determining how much cash is appropriate for you. Most people fall into one of the following camps:

  • Most of their money is in low-interest accounts (or under their mattress) with little to no investments
  • Most of their money is in individual stocks with little to no cash

While every situation is unique, it’s usually a good idea to be somewhere in the middle. Defining your goals and understanding your expenses can help you decide what is right for you.

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Here are considerations for determining your cash needs:

What will help you sleep at night?

One of my favorite quotes is by President John F. Kennedy, “The best time to fix the roof is when the sun is shining”. My interpretation of this is to save during the good times because bad times could be just around the corner.

Unexpected layoffs happen. Cars break down. Kids need braces. These expenses are all uncommon but are inevitable in our lifetime. The general rule of thumb is to keep 3-6 months of expenses in cash, in case of emergencies. If you and your partner both work, 3 months might be appropriate. If you’re the sole breadwinner and have 3 kids, 6+ months might be better for you. I generally recommend 3-6 months minimum, plus whatever cushion will help you sleep better at night.

Expenses over the next 6-12 months

While our emergency fund is generally there for the unexpected, there are some expenses we know are coming. These can include property taxes, car registration, or school tuition.

Because we know roughly the amount due and when, we should be prepared to pay for it. Although it can be tempting to take that money to Vegas and double it on red, it is better to minimize your risk and keep it in cash.

Tax payments

A key difference between Tax Preparation and Tax Planning is Preparation is rear-looking while Planning is forward-looking. With the right Tax Planning, you can accurately project what your future tax liability will be in April and prepare for the tax bill.

You should be prepared for a potential tax bill whenever you receive a large bonus, vest stock, or sell a home. This can either be by paying your tax liability when you file your returns or by making quarterly estimated tax payments throughout the year.

Home Downpayment

Buying a home is generally the largest purchase someone will make in their lifetime. With rising interest rates, it is more important than ever to make sure that you have enough downpayment to purchase your home.

Most banks require that your downpayment has existed in your back account for 60 days – 6 months. This is because the bank wants to verify that you didn’t borrow the funds from a temporary or fraudulent source simply to qualify for a loan. If you are saving to buy a home in the next 1-2 years, it’s generally a good idea to keep your down payment in cash (preferably in a high-yield savings account).

Understanding the correct amount of cash to keep on hand is essential in optimizing your financial plan. If you would like to work with a financial planner to walk you through your options, I would love to help you!

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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.