Let’s keep this simple, so it’s clear.
You should always have 6 months worth of living expenses in cash.
How do you calculate it?
Use a financial portal like Financial Zen or Mint or YNAB.
Then look at your last 12 months of spending and divide it by 2.
If you had big one-time expenses ($10k+), then you can take those out. Anything under $10k, then leave it in.
There ya go.
Can I keep more in cash?
6 months is the official Financial Zen recommendation.
Suze Orman recommends 9 months.
Others recommend 3 months.
Still others recommend 12 months.
If you’re in a really senior position where the air is as thin as the job opportunities, then 18 months wouldn’t be crazy.
Where should I keep my emergency fund?
We recommend Ally Bank, but any high-yield savings will work.
Do NOT keep it a big bank. They are paying a fraction of what you can get in Ally or Capital One or Marcus.
You should be earning 2% at a minimum right now.
Should I keep cash for anything other than an emergency fund?
Yes, for short-term goals that you can’t/won’t finance.
If you have a big expense within the next 12 months then keep the money in cash.
If it’s big, but beyond 12 months, then invest in short-term corporate investment grade bonds. (Those are paying ~4% right now.)
Avoid the unforced error
One of the most common unforced errors we see is people who are sitting on too much cash.
You shouldn’t have a penny more sitting in cash than what you need for an emergency fund and short-term goals.
Otherwise, you’re throwing money out the window.
(And Financial Zen Masters don’t waste money.)
