HapiMoney

A question that people often come across is how much cash to keep on hand (not literally on hand, obviously. Put it  in the bank).  The short answer is 6 months worth of expenses + the value of any large expected cash purchases within that time frame. If you spend $1000 a month and aren’t expecting to buy anything big, keep $6k in your bank account.

Wanna know why? Read on.

The only thing that your cash does for you is provide what’s called “liquidity“. It allows you to quickly and easily pay off any expenses without having to sell assets like stocks, bonds, CD’s, etc, and without incurring penalties or losses for doing so.  Don’t misunderstand here: liquidity is enormously important considering how risk free it is, but it’s extremely costly…you won’t earn hardly any interest. No interest means that inflation and other costs slowly eat away at its value like a tiny termite farm.

Thus, there is a delicate balance between minimizing risk and maximizing returns. That’s why your cash should be your “Emergency” fund.  It should be there to pay daily expenses but also allow for the “oh sh%t” moments in life: layoffs, cell phone fees for your 1-900 calls to television psychics, and other unknowns. Obviously, 6 months worth is fairly arbitrary, but it works well, especially in an economic climate of uncertainty.

The next step, once you’ve figured out how much to keep in cash, is where to put it. We’ll cover that next.