Editorial Team

How Much Cash Should I Be Holding?

When trying to figure out your personal finances, it can be tough to know how much money is “enough”. You are obviously supposed to be saving money and prepping for retirement but how do you know if you are making enough progress? For some people, it is easy to count every penny and just funnel as much cash as possible to their savings account.

Even though this can feel like you are making good progress, simply piling cash into your savings or checking account is one of the least effective methods for creating wealth. Since building wealth is the ultimate end goal of saving cash, this presents a serious problem!

This article will examine how much cash you should have on hand at any given moment.


What accounts do I need?


One of the biggest reasons why people do not know how much cash they should be holding is simply due to the massive number of accounts that they have to choose from. Today’s banking industry has made it incredibly complex to move money around and for some people, this takes hours of work each week. In fact, almost 50% of millennials report using over five financial apps to manage their money.

With so many options to choose from, it can be easy to feel overwhelmed and just not make any decisions at all. The more money you have to invest means the more pressure you feel to make responsible decisions. This is especially true for wealthier millennials, with people making $160,000+ leaving over $40,000 just sitting in their checking account. For millennials in lower-income brackets, there is also a fear of not having enough in your account and accidentally getting dinged for overdraft fees.

All of this results in tons of money sitting in near useless checking/savings accounts. This is why one of the first things that most people can do is simplify their banking. Since there are so many options for banking, all with slightly different advantages, it can be easy to open a few different accounts. Most people will have one or two checking accounts, savings, retirement account, and at least one credit card. Sometimes these accounts are all with different providers.

For the most part, having multiple accounts is unnecessary. We would recommend simplifying your banking and only having the following accounts:

  1. Checking account
  2. Investment account

The one account, in particular, that is really not necessary is your savings account.


Let’s take a look at why.


Savings accounts do not serve a purpose


There are two main reasons why people transfer money over to a savings account:


  1. To keep this money separate from their spending money so they do not accidentally spend it.
  2. So that their savings can collect interest and grow.

For reason number one, savings accounts do serve the purpose of separating your savings from your spending money. However, so does stuffing your savings under your mattress or just keeping it in a safe. However, reason number two is why savings accounts are not effective in helping you build wealth. What most banks do not advertise is that the average rate of interest at most national banks is only .01%. You do not need to be a finance guru to know that .01% is not very high. In fact, it is so low that this rate of interest will not even protect your money from the depreciating power of inflation.

Let’s take a closer look at that.


What is inflation?

Inflation is defined as the “steady increase in the prices of goods over time.” However, another way to put this is that your dollars become slightly less valuable every year (at a rate of approximately 2% each year). This is the reason that a cheeseburger or tank of gas cost so much less in the 1950s than it does today.

This means that if you try to save for retirement using a savings account, your money will be worth significantly less when you actually go to use it. Imagine if a person from the 1950s time-traveled to 2020. They would feel incredibly poor because the price of almost every good is significantly higher than it was in 1950. The same will be true for you when you go to retire 20, 30, 40, or 50 years from now.

The good news is, however, that there is a way to prevent this from happening.



So what should I do?


Back to the topic of how much cash should you have. The answer is that you ultimately want to keep as little as possible in your checking account. Checking accounts are still valuable for easy access to your spending money but these accounts do not offer high rates of interest. We would recommend keeping enough cash in your checking account to cover your daily spending.

Additionally, it is also a good idea to include a little extra in case of emergencies (usually 3-6 months worth). This will give you the peace of mind knowing that you have immediate cash to cover all of your spending and any emergencies that should occur.

For this, you should also consider finding a checking account that offers a high rate of interest. For example, Unifimoney’s hybrid checking/savings account offers an interest rate of 0.2% APY which is significantly higher than the national average. This way, even your spending money will be collecting interest while it sits in your account.

However, besides your spending money and an emergency fund, the rest of your money should be invested. This is what will allow your money to grow, outpace the depreciating power of inflation, and grow your wealth. Remember that the average national rate of interest is around 2%. This means that in order to outpace inflation, you need to invest your money somewhere where it will grow faster than 2% per year.


What are my options?


When it comes to investing, there are plenty of places that you can invest money. However, the most common and easiest place to get started is in the stock market. When you buy a stock, you are simply buying a piece of ownership in a company. As a shareholder of the company, you will benefit when the company performs well in the form of the stock price going up and (sometimes) dividend payments. Additionally, buying index funds or ETFs (exchange-traded funds) will give you the benefit of the overall growth of the stock market (instead of buying individual stocks).

The average historical return of the stock market is approximately 10% per year. This means that $10,000 invested in the stock market will have grown more than $6,000 in 5 years! This is exponentially more than you would earn keeping your money in a savings account earning .01%.


NOTE: Keep in mind that the stock market fluctuates day-to-day. This means that there may be some days where your portfolio loses money. This is common and not a cause for concern. Over an extended period of time, the stock market has been proven as a reliable vehicle for wealth creation.


We hope that you have found this article valuable when it comes to learning how much cash you should have on hand. To learn more, please subscribe below to get alerted of new articles as we write them.

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