We’re living through interesting economic times. On the one hand, inflation is — and has been — stubbornly high. On the other hand, the investing markets are swinging. More than ever, clients are asking: “How much money should I keep in cash?”

Believe it or not, the answer is the same when the markets are volatile and when they’re (relatively) calm. And it’s the same regardless of how “cautious” or “risky” you tip. When it comes to how much you should keep in cash vs invested, you don’t want too much or too little — you want a “just right” amount based on your own budget and financial goals.  

It’s easier than you may think to find your cash-on-hand “sweet spot.” But before you make any money moves, let’s get on the same page with some key financial terms, like what we really mean when we say “cash.”

What does it mean to keep money “in cash”?

In the world of personal finance, “cash” doesn’t usually mean literal cash, like the green stuff you can physically hold in your hand (or hide under your mattress, stash in the cookie jar, etc). Instead, it tends to mean the money that lives in your checking or savings account. Both of those bank accounts should be NCUA- or FDIC-insured in order to protect your money in the unlikely case of disaster. Most bank accounts are covered, but with the rise of digital banks, it’s worth making 100% sure.

Ideally, you’ll have both types of accounts, plus a plan for how much money to keep in your checking account and how much to keep in savings. And for good reason.

Why does it matter how much you keep in cash?

Because keeping money in cash is all about stability and liquidity. And if you were to find yourself in a scenario where you need money now — say you lose your job, or have to manage a financial emergency — you want a stash of money in accounts you can quickly and easily access. Without it, you could find yourself in the really tough place of using your credit card to get by or cashing out your investments (which could trigger taxes and have other unwanted financial impacts).

Having the right amount of cash on hand can also work wonders for easing your overall sense of financial stress, even (and especially) during the height of a crisis. Nothing beats a sense of financial security. That said, there are some good reasons not to keep too much money in cash:  

• Inflation decreases the value of any money you hold in cash. Inflation, aka rising prices over time, reduces your purchasing power. That $10 bill could have bought you a whole sandwich a few years back. Today, the sandwich costs $12.50 (if you’re lucky), so the same $10 bill only buys you 80% of the sandwich. Even if inflation were at the government’s “target” rate of 2%, the interest you’d earn on your savings account just wouldn’t be able to keep up. And now, with inflation above 8%? No chance.

• Investing for the long term gives you an opportunity to earn higher returns. In fact, the stock market has returned an annual average of 10% since 1928 — way higher than any savings account interest rate, even the “high-yield” ones. Of course, investing always comes with risk. Especially when markets are volatile, it can be tempting to pull money out of your investment portfolio and wait for things to “calm down.” But that comes with its own risk, too — nobody knows what will happen tomorrow, and if you stop investing, you could really miss out if the markets go back up.

So how much money should you keep in cash?

The exact amount to keep in checking and savings will be different for everyone, but it’s always the sum of three things:

1. The money you use to pay your bills. What you need for everyday living expenses.

1. Your emergency fund. The exact amount you need will depend on your financial situation, but we typically recommend aiming for three to six months’ worth of take-home pay (or up to nine months’ worth, if you’re self-employed). Consider keeping your emergency fund separate from all other funds set aside for other goals. This will give you a clear picture of how much you’ve reserved for your emergency fund.

1. Any money you’ll need within the next two years. What you need for short-term goals, including vacation funds, money for next year’s car insurance, etc. Investing is a long-term game, so it’s generally better to invest money for timelines longer than two years. Keep this in mind when you’re approaching the last year or two of a long-term investing goal. Say you’ve been investing to put a down payment on a home and want to do it next summer; you might consider withdrawing it as cash or leaving it invested (ideally in a portfolio that gets more conservative as you approach that date, like we do for you at Ellevest). Discuss your best next move with your financial expert.

When the economic landscape feels uncertain, it’s OK to pad your numbers just a little — keep a little extra wiggle room in your checking account, beef up your emergency fund a bit. Practicing financial wellness is as much about feeling confident as it is about doing the right things with your money. How much cash you should keep in the bank today might be a little different than it was (or will be) — and that’s a good thing. It means you’re staying on top of your “just-right” number, which, from our POV, is the just-right move.

Want help figuring out how much you should keep in cash? Book a complimentary 15-minute call with an Ellevest financial planner to work through your next financial move.