We know it’s important to have cash available for our everyday spending needs as well as the inevitable “rainy day.” While it may seem like a good problem to have, having too much of your savings sitting in cash can be an issue, especially when you are investing for long-term goals such as retirement.
To help you determine how much cash makes sense for your situation, try using the acronym “USES”:
• Unexpected expenses and emergencies: Cash used for situations such as a job loss, a home repair or an unplanned medical expense.
How much? In general, about three to six months’ worth of living expenses
• Specific short-term savings goal: Cash dedicated for a goal that will occur within the next year or so, such as a wedding or vacation.
How much? The amount would be based on the goal.
• 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.
How much? If you’re retired, about a year’s worth of income needs. If you’re still working, about one to two months’ worth of living expenses in cash, refreshed by your paycheck.
• Source of investment: Cash used as an asset class and as a source for investment opportunities.
How much? In general, up to 10 percent of your fixed income in cash, which would be approximately 5 percent of your overall portfolio.
The risk of not investing
Some people hold too much in cash, viewing it as a safe haven against the risk of a market decline. But cash is not risk-free: If it’s designated for a long-term goal such as retirement or education, the biggest risk you face isn’t a temporary pullback in the market; rather, it’s the possibility of not reaching your goal.
By ensuring you have each of the “USES” areas covered, you can better focus on your longer-term goals, including preparing for retirement and paying for education. Schedule some time now with your financial advisor to review your “USES” of cash.
Scott Thoma is a researcher at Edward Jones.