How Much Cash You Really Need
Determine how much cash you need in case of an emergency.
In every stage of life, having a financial cushion (cash on hand) can prepare you for potential emergencies and provide some peace of mind.
While most experts recommend maintaining three to six months' worth of basic living expenses in an emergency fund, the amount of cash you really need depends on a few factors, including your current life and financial situation, your risk tolerance and your goals.
Consider your situation
Determining how much money you need depends largely on your current financial needs and risks.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"If you're single, you might be comfortable with less than six months of savings," said Carl Holubowich, CFP, principal at D.C.-based financial planner, Armstrong, Fleming and Moore. "But if you have a spouse, kids and a mortgage, or if you worry about replacing a lost job or other income quickly, you likely need six months or even more."
Putting more cash in savings, like one of the best high-yield savings accounts, is also a good idea for prospective homebuyers who want to establish a sizable down payment, which is especially important as 30-year mortgage rates are still high.
If you're nearing retirement, you may want more than the standard six-month requirement to preserve the wealth you've built in case there's a bear market and your investments don't meet your expectations.
"Keeping two- or three-years’ worth of expenses can provide a safety net to help get you through a down stock market," says Holubowich.
Evaluate your risk tolerance
Consider the degree of risk you're willing to endure. The term is generally used for investors who can experience a lot of short-term volatility with their investment portfolios, but it can also apply to emergency savings.
If you tend to feel a lot of anxiety about a potential job loss or other major financial emergency, it may make sense to save more money to put your mind at ease. But if you're less worried about emergency expenses that may or may not happen, and you'd rather use your money for other financial goals, a smaller emergency fund may be a good fit for you.
Align your savings with your goals
While a solid emergency fund is important for managing financial risks, it's just one aspect of your overall financial plan. Depending on your cash flow, you may be able to work toward multiple savings goals at the same time, or you may need to prioritize one goal at a time.
The key is to consider the benefits of all of your financial goals to determine how to manage your money more effectively.
If your employer offers a 401(k), complete with a contribution match, for instance, it may make sense to maximize that match instead of putting that money into a savings account because it's essentially a 100% return on your investment and can accelerate your retirement savings plan.
If you have high-interest credit card debt, it could be a good idea to build up a small emergency fund to give you a buffer, then tackle your debt to free up more cash flow once you pay off your card's debt.
Determine hard numbers for your situation
As you consider your current situation, risk tolerance and goals, come up with a figure for cash on hand that will give you peace of mind. You may land on this number based on your monthly income or basic necessities, or you may simply use a flat amount that makes you comfortable.
Whatever you do, take your time to understand your situation, so you can come up with an amount that works best for you.
Related Content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Ben writes about all things personal finance, including consumer credit, credit cards, mortgages, student loans, investing and budgeting, as well as travel. Before his career as a writer, Ben worked in financial planning and insurance, banking and auto financing. After working as a staff writer at NerdWallet and Student Loan Hero, he started freelancing full time in 2018. Ben earned a B.S. in business administration with a finance emphasis from Brigham Young University. He lives near Salt Lake City with his two kids and two cats.
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Want to Give Money to Your Adult Children? 10 Things You Should Know
It’s less taxing to give money to your adult children than you might think. A good plan can help you avoid certain pitfalls — and drama.
By Jeremy Greenfield Published
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
How to Navigate Finances as a Blended Family
If you’re planning to become part of a blended family, consider these financial issues as you and your spouse start a new life.
By Ella Vincent Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Is Harris’s $25k Down Payment Assistance Good or Bad for Homebuyers?
Democratic Presidential candidate Kamala Harris plans to offer $25,000 in down payment assistance for first-time homebuyers. But is this good or bad for the housing market?
By Erin Bendig Published
-
Women's Wealth Growing: How to Handle It Like a Pro
Even as women play catch-up because of the gender pay gap and caregiving responsibilities, they're winning financially.
By Tiffany Welka Published
-
How to Spot a Contractor Who's Not Playing by the Rules
Being a general contractor is not a game, yet some misrepresent what they're licensed to do. Here's a cautionary tale, plus some signs to watch for that something's off.
By H. Dennis Beaver, Esq. Published
-
How to Rank Your Financial Priorities
Circumstances are different for everyone, but this adviser with 20-plus years of experience shares some insights on getting your financial priorities in order.
By Andrew Rosen, CFP®, CEP Published
-
Where To Put Your Money As Interest Rates Drop
Earning 5% returns on your money is slowly coming to an end. Even so, there are places to put your money that still make sense.
By Kathryn Pomroy Published