Managing your cash can be a tricky balancing act. On one hand, you want to make sure you have enough for any potential near-term needs and to help you sleep well at night, while on the other hand, you don’t want to keep too much when you know you could be doing other, more productive, things with it. In this episode, we share our approach for managing cash. We cover the entire process, from figuring out how much to keep (between your emergency fund, any cash earmarked for near-term goals, and what “feels good”) to figuring out what to do with the cash you do decide to keep on hand.
Outline of this episode
- What we mean when we're talking about cash [1:13]
- The rationale for keeping an emergency fund [1:54]
- Quantitative and the qualitative aspects of your emergency fund [4:28]
- Earmarking money for short-term goals [8:09]
- What to do with the cash you keep on hand [10:17]
- Recap [14:32]
The first step to deciding how much cash you need
The first step of figuring out how much cash to keep on hand is figuring out how much to keep in an emergency fund. As with most things in financial planning, we like to follow a process when breaking this down and figuring out what number is right for you. There isn't one "right" answer for how much cash to keep in an emergency fund, but it's important to be intentional with your decision.
The financial rule of thumb is three to six months’ worth of living expenses, but you also want to take into account your household's income situation. Single-income households would want more cushion than dual-income households. You'll also want to consider your and your spouse’s or partner’s views toward money and do what feels comfortable for you (or find a compromise if your views on it are different).
How much cash do you need outside of your emergency fund?
After deciding on the amount for your emergency fund, the next step is to think about the various uses of money you'll have within the next one or two years. Do you have goals such as a home or car purchase, renovations, etc.? Step one was about covering lumpier uses of the cash that aren't necessarily visible or predictable. Step two is looking at expenses that are visible, expenses that you know will be coming sometime soon, even if you don't know the exact timing of when that will be. You’ll want to add these target amounts to your emergency fund and then you'll have an idea of the total amount of money to keep in cash to fit your unique situation.
What to do with the cash you’re holding?
There aren't a lot of great options right now in terms of earning a rate of return on cash. If you look at the interest rates for most savings and checking accounts being offered by the banks, it's only slightly above 0%, and while some may offer teaser rates these are only good for a limited amount of money.
The approach we use for our own cash is a high yield online savings account. There are many different options here, but they offer a much better interest rate than most traditional banks, while also having flexibility and certainty of knowing what the money will be worth when you actually need it.
Resources & People Mentioned
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup