For a long time, having money sitting in a savings account felt a little like putting it in time-out. You knew it was safe, but you weren't getting much in return. Then interest rates went up, and suddenly cash became a lot more interesting.
High-yield savings accounts, money market funds, CDs, and Treasury bills started offering yields that were hard to ignore. After years of near-zero interest rates, earning a meaningful return on money you weren't ready to invest felt like a financial win. And in today's market, cash is still paying something. But that raises an important question: If cash is earning a decent return, should you keep more of it?
There Are Good Reasons to Hold Cash
Cash has a very important job in a financial plan: it provides flexibility. An emergency fund can help cover an unexpected car repair, medical bill, job loss, or leaky roof without forcing you to sell investments at an inconvenient time. Cash can also be useful for money you know you'll need soon. If you're planning to buy a car next year, make a down payment on a home, or pay for a major expense in the next few months, putting that money in the stock market probably isn't worth the risk.
For retirees, cash can play an even bigger role. Having enough readily available money to cover near-term spending can provide a buffer against having to sell investments during a market downturn. In other words, cash isn't just about earning interest. It's about buying yourself options.
But Cash Has an Opportunity Cost
Here's the catch: Just because cash is earning interest doesn't mean it is necessarily the best place for all of your money. Imagine you have $100,000 sitting in cash because the interest rate looks attractive. You're earning something, but you may also be giving up the potential for long-term growth from investments such as stocks. That's especially important when your time horizon is measured in decades rather than months.
There is also inflation to consider. If your cash earns 4% but prices rise 3%, your money has gained purchasing power, but only modestly. And if inflation rises while your cash rate eventually falls, that advantage can shrink. The goal isn't to earn the highest possible return on every dollar. The goal is to give every dollar a job.
So, How Much Cash Is Enough?
There isn't one magic number that works for everyone. For someone still working, an emergency fund might cover several months of essential expenses. Someone approaching retirement may want additional cash or short-term investments to cover upcoming spending needs. The important thing is to separate money you need soon from money you need to grow over time.
A simple way to think about it:
Short-term money:
Keep it safe and accessible.
Long-term money:
Give it an opportunity to grow.
That distinction can help prevent two common mistakes: investing money you'll need soon or keeping too much long-term money sitting on the sidelines.
Cash Is a Tool, Not a Strategy
It's easy to look at an attractive cash yield and think, Maybe I should just keep more money here. But financial decisions shouldn't happen in isolation. If you're holding cash because you need it for an upcoming expense, that's intentional. If you're holding cash because the stock market feels scary, that's a different story. And if you're holding cash because you're waiting for the "perfect" time to invest, you may find yourself waiting indefinitely.
Cash can be a valuable part of a financial plan. It can provide security, flexibility, and even a little income along the way. But its job isn't necessarily to replace your long-term investments.
The question isn't, "How much can my cash earn?" but "What job does this cash need to do?"
Once you answer that question, deciding how much cash to keep becomes a whole lot easier.
Best,
Chandler