Time to talk about one of the mostly highly contested views in personal finance – whether you should keep money in cash or invest it! There are some blogs and resources out there that talk about keeping as little cash as possible since bank interest rates are low and your money’s buying power is lowly eaten away. While I understand where everyone is coming from, I also think that this advice can potentially hurt a lot of people. So, why do I think it is important to always keep a good supply of cash in the bank? Because cash is always there for you!
Now, I am not saying that you shouldn’t invest or keep everything in cash. That wouldn’t make sense and would make it extremely difficult to achieve your long term goals. What I am saying, however, is that you should keep a healthy amount, 3-6 months of expenses or more depending on your financial situation, to be ready in case something happens.
4 Reason to Always Keep Some Cash
#1 – Cash Provides Peace of Mind
What happens if 2008 happens again, the economy slows into a recession, markets crash, and you kept all of your emergency fund in investments? Well, if you don’t lose your job or happen to have an emergency occur during this time, nothing really happens. Your investments go down, but the losses are only on paper. However, if anything were to happen during this time that would require you to tap into your emergency funds, you are pulling money from a deflated (Whoops, sorry Patriots fans) investment pool and locking in losses at the worst possible time.
If emergencies happen, you want to be sure that your money will be there for you and can be pulled quickly. There is no better way to achieve that than keeping savings in cash.
#2 – Cash Allows You To Take Part in Opportunities
By keeping some money readily available, you give yourself the ability to take advantage of opportunities that may present themselves to you. Maybe the stock market dips and you want to speed up your dollar cost averaging or you have an opportunity to create a new business that you’ve always wanted. If you don’t have liquid funds, being able to move quickly into opportunities becomes much more difficult.
#3 – Cash Provides Flexibility
Cash can also provide you flexibility for numerous things that may come up in life. Your cash cushion could help provide short-term relief after deciding to change career paths. Cash can also help lessen the burden of having a new child at home and allow one or both parents to take a little more leave from work. Cash gives you options that you don’t necessarily have when your money is invested.
We have realized firsthand just how much having cash can create flexibility (which you will be able to learn more about in a couple weeks when we are ready to announce – how is that for a teaser :)). Without keeping 3-6 months of cash (we currently have roughly 5 months) in cash, we wouldn’t have felt comfortable moving in the direction we are going.
#4 – Online Savings Accounts
Yes, it is true that your money does lose purchasing power everyday it sits in a savings account due to inflation and the current low rate environment. However, the introduction of online savings accounts has helped lessen the loss of purchasing power by offering better rates than you can find in a brick and mortar bank, with some rates reaching above 1.0% (According to BankRate.com as of 9/14/2015).
The increase in rates due to the growth of online savings accounts does a lot to make it closer to keeping up with inflation, thus lessening the loss due to inflation. While it is still not easy to know you are actively losing money by keeping it in cash, the smaller spread makes it a little less painful.
While everyone’s situation is different, there is one area that I think everyone can benefit from keeping some funds as cash. The ability to take advantage of opportunities, along with the ability to provide you with peace of mind and flexibility makes cash an important inclusion in your financial plan. And with the rise of online banks, you can decrease the spread between returns and inflation, making the decision to hold cash a little more practical/less painful. Just review your situation and settle on a goal for the amount of cash that you will realistically need set aside so you can have the flexibility and peace of mind that cash can offer. When it comes to ones finances, always have some cash in the bank.
What is your view on keeping cash? How many months of expenses do you think is a good cushion?