The Verus Team

How Much Cash Do I Need?

By: George Shirley    Opinions expressed are those of George Shirley and not necessarily those of RJFS or Raymond James

We often get asked “how much should I keep in cash?”  Conventional wisdom usually gives a number of months (3,6,12) times your regular expenses as an appropriate amount.  And with marketable securities being convertible into cash in 3 days, some even suggest less, preferring to keep more invested in an optimal asset allocation as opposed to earning a minimal amount by keeping the funds in cash.  But I have found that more cash, may lead to more security and can make it easier to deal with significant volatility in the markets.     A recent article in the Wall Street Journal

 http://www.wsj.com/articles/the-more-cash-people-have-the-happier-they-are-1473645781
 
cites research that concludes the higher the balance of your bank account, the greater the feeling of well-being towards your financial situation--even more so than the actual level of net worth.   This is a fascinating study for financial advisors to consider.   While part of the job as an advisor is to determine an appropriate allocation mix, could having a more optimal allocation mix actually cause less financial well-being?  Certainly the stability of your job, the consistency of your monthly earnings (those in commission sales would likely need to keep more on hand) should play a part in how much you keep on hand.  But after reviewing the numbers, the financial spreadsheets, quarterly reports etc.  the job of a financial advisor is to guide people on a path to financial confidence where their finances are aligned with their goals and values.  If keeping a higher percentage in cash would accomplish this, perhaps we need to create a new model portfolio matrix. I have never heard someone say that they weren’t concerned about the risk in their portfolio when their investments were allocated optimally in the efficient frontier for risk and return.  But I have heard many people feel comfortable with market swings and volatility given the amount of cash they have on hand.     

This information is not a statement of all available data necessary for making an investment decision, and does not constitute a recommendation. Every investor's situation is unique, you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation.