How Much Cash Should I Hold?

Key Takeaways
  • Rising inflation increases the opportunity cost of holding cash
  • We believe the benefits of cash outweigh any loss in purchasing power
  • Market drawdowns like today are relatively good times for long-term investment





The question we are getting more than any other these days is, “What should I do with my cash?” Various forces are bringing this question to the front of people’s minds. With a strong economic recovery as we (hopefully) put Covid in the rearview mirror and forgiveness from PPP/ERTC, some people are finding themselves flush with cash. Others have held cash during the uncertainty brought on by the pandemic.


Many are reading about the highest inflation rate in a generation and are nervous about cash losing purchasing power. We are all witnessing war in Ukraine and wondering what it means for the future. With all these important questions swirling, it is a good time to take a step back and revisit our fundamentals.


Cash is one of the most personal items we address in financial planning. Some people require a great deal of cash savings to go about their lives without inordinate stress, while others prefer to keep minimal balances. We find one’s “cash personality” is not highly correlated to job security, overall wealth, age, sex, or any other factor. Determining how much cash one should hold is where the art of planning supersedes science. However much money one needs to maintain discipline in the rest of their financial plan is usually the right answer.


Long-term portfolio performance is highly correlated to overall risk and time at risk. Maintaining ample cash lets you weather the volatility associated with portfolio risk. If asked to rank the benefits of cash as planners, we would put the top three as:


  • Tied for 1st Place: Risk Asset Discipline. Cash helps you endure portfolio volatility.
  • Tied for 1st Place: Liquidity for Opportunities. Good investments can appear unexpectedly.
  • Distant 3rd Place: Principal Protection. The #1 benefit when you think of cash as an investment only.


My friends and clients know I’m married to a mental health therapist and sometimes tend to answer questions with my own questions. The many times I have been asked about cash over the last several months, I always probe to ask, “what question are you really asking?” Uniformly, there are three ways to rephrase the many questions we get about cash.


  1. Should I be doing something to squeeze more yield out of my short-term cash?

The answer to this question is almost always no.


Most of the time, this question is motivated by the specter of inflation whittling away at the purchasing power of cash. We are not asking you to hold an emergency fund because it is a profitable investment. Whatever amount of cash you need to live comfortably should be safe and accessible. Sometimes, we advise clients to park a portion of permanent emergency savings in CDs, or today, I-bonds, but this advice is driven as much by behavioral goals (segregate savings from spending account) as investment goals (increase yield).


  1. Is now the time to invest cash for the long-term?

History tells us the answer to this question is almost always yes.


Markets often have down months, occasionally have down years, and rarely have down decades. Any time we enter correction or bear market territory tends to be a good time to invest for the long-term. This is not to say that we are calling a bottom; we don’t believe in anyone’s ability to do so successfully.


  1. Is now the time to go to cash with my long-term investments?

Conversely, history tells us the answer to this question is almost always no.


This is primarily because profiting off of market timing requires one to choose both the correct time to get out and the correct time to get back in. Today feels like one of the times where we must guard against our human tendency to try to assert control. With war on our minds, it can be helpful to remember that there are always reasons to go to cash and to stay the course and that historically, the latter has been more profitable.


Long-term investors must acknowledge their “cash personality” and plan ahead with ample cash for their liquidity needs. We’re confident the families we serve have done so and are well-positioned to continue to be disciplined long-term investors.


Read more articles about cash here. Watch videos from our Advisors here. 



Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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