How Much Money Should I Keep in Cash?

By Ellevest Team

We’re living through some bumpy economic times right now. On the one hand, inflation is — and has been — much higher than we’ve gotten used to. On the other hand, the investing markets are a-swinging. Even when the economy is relatively calm, it’s good to be sure you’re not keeping too much (or too little) money in cash, but now, it’s even more urgent.

An illustration of two stacks of cash and three piles of coins.

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

In the world of personal finance, “cash” doesn’t usually mean literally cash, like the kind you can physically hold in your hand (or hide under your mattress, stash in the cookie jar, etc). Instead, it tends to just mean that the money lives in your checking or savings account

The point of keeping your money in cash is stability and liquidity. So the bank accounts you choose should be NCUA- or FDIC-insured (most are, but with the rise of digital banks, it’s worth making 100% sure) and allow you to withdraw or transfer your money out quickly and easily. 

Why does it matter how much you keep in cash?

You should keep some money in cash, because it gives you financial stability. If you have too little, you could find yourself in a really hard place if you lose your job, or if a financial emergency pops up. But there are some good reasons not to keep too much in cash, too.

Inflation (aka rising prices over time) reduces your purchasing power — in other words, it decreases the value of any money you hold in cash. (That $10 bill could have bought you a whole sandwich in 2019, but in 2022, the sandwich costs $12.50, 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. 

Plus, when you invest for the long term instead of saving your money in cash, you have the opportunity to earn higher returns. In fact, the stock market has returned an annual average of 10% since 1928way higher than any savings account interest rate, even the “high-yield” ones. And that makes a big difference: The gender investing gap (men tend to invest 40% of their money, whereas women tend to invest just 29%) is one of the leading causes of the gender wealth gap.

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 — 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 should you keep in cash?

The exact amount will be different for everyone, but it’s the sum of three things:

  1. The money you use to pay your bills. This one’s fairly straightforward — money for everyday living expenses should stay in the bank.

  2. Your emergency fund. Seriously. Keep it in cash. 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’, if you’re self-employed).

  3. Any money you’ll need within the next two years. Save for short-term goals (vacation funds, money for next year’s car insurance, etc) in cash, too. If the markets keep going down, one or two years may not be enough time for it to hopefully go back up. Investing is a long-term game, so it’s generally better for timelines longer than two years.

    That said, if you’re approaching the last year or two of your long-term investing goal — say, you’ve been investing to put a down payment on a house and want to do it next summer — it’s not so black and white, especially if you’re not sure you’re going to use it that soon. Whether you decide to withdraw it as cash or leave it invested (ideally in a portfolio that gets more conservative as you approach that date, like we do for you at Ellevest) is up to you and your tolerance for risk. Pulling your money out generally triggers taxes, so there’s that to think about, too.

When the economic landscape feels uncertain (like right now), it’s OK to pad these numbers just a little — keep a little extra wiggle room in your checking account, beef up your emergency fund a bit. But the advice is the same, at its core. 

So channel your inner cash-keeping Goldilocks — not too hot (much), not too cold (little), but juuuust right. And feel good about the fact that you’re doing right by Future You.


© 2022 Ellevest, Inc. All Rights Reserved.

Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.

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Ellevest Team

The Ellevest team is working to help women reach their financial and professional goals.