How Much of Your Money Should Be in Cash?

How Much of Your Money Should Be in Cash?

Rate information contained on this page may have changed. Please find latest savings rates.

We all know the expression that cash is king. But with rates on savings, checking accounts, and CDs in the low single digits, the question is, how much of a king? How much money should an individual hold in cash?

I spoke with Marc Freedman, President of Freedman Financial in Peabody, MA who said that individuals should "never use their investment account as their emergency fund." In general, he recommends that individuals hold enough money in cash to handle six to nine months of fixed expenses. While it's nice to get interest on your money, he said the main goal of your emergency fund is that it be safe and accessible. For this reason he recommends savings accounts or money market accounts.

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Good advice. I personally also like to hold cash if I have an impending big expense. If I am making a major purchase within one to two years, then I'll generally switch the funds to cash to be prudent. We've all heard stories about friends, or friends of friends who planned to buy a home and the down payment evaporated along with the stock market. In this case, a savings or money market account, or a certificate of deposit might be the right fit.

Warren Buffett keeps an enormous amount of cash on hand to be ready and liquid should the right investment opportunities arise. Since Buffett had cash-on-hand, he was able to loan Goldman Sachs and Bank of America money at very advantageous terms. Having cash when others don't can be a big advantage.

Contrarian View of Cash

There are some that argue that cash can even be part of an overall investment portfolio. Marketwatch reported in 2011 about investor Charles Almon advisory service called Growth Stock Outlook. In 1986, Almon moved the bulk of his portfolio to cash and has kept it there ever since. His portfolio is 76% cash and holds just four stocks: Altria Group, Bristol-Myers Squib, Newmont Mining, and Phillip Morris. Despite the fact that he has held mostly cash for one of the largest bull markets in U.S. history, as of September 2011, his portfolio registered an annualized gain of 8.6% versus an annualized gain for the Dow of 8.4%. This is not a truly fair comparison since the Dow annualized gain does not include dividends. But it is still interesting that Almon's cash-rich portfolio came out ahead when just comparing prices.

Two things contributed to this. Great stock selection. Almon's stocks outperformed the overall stock market. And the volatility of the stock market. During the Internet boom and the housing bubble, Almon was well behind. But the stock market fell back to a mean growth level. While there have been some big negative years for the stock market, Almon's cash holdings have never lost money. Instead, they grow and compound every year.

Is this saying that an investor should put all of their money in a 2% 5-year CD? No. But having an emergency fund in cash isn't necessarily the worst investment either.

Building a Cash Fund

Here's how I think about how much cash I should hold. I add:

  1. Emergency Fund: Six to nine months of fixed living expenses.
  2. Major Purchase Fund: Any major purchases I plan to make over the next one to two years (I like to pay out of savings instead of taking on debt via a home equity loan, mortgage refinance, etc.). This could include paying for a wedding, paying for college tuition, putting a down payment on a home, house renovation costs, etc.
  3. Opportunity Fund: A small portion of my investable portfolio that I keep in reserve should a good investment opportunity arise quickly.
  4. Peace of Mind Fund: A portion of my funds that I set aside for peace of mind. The older the investor, the larger this might be. Remember, the purchasing power of this fund may shrink over time if inflation exceeds the savings rate so this peace of mind may comes with a price.

For other opinions and to determine your specific cash allocation, speak to a qualified financial advisor.

No matter what percent you put in cash, make sure to get the best rate on the money in the bank. As Charles Almon showed, by being prudent, a cash investment can still grow. The best bank rates are often 1% higher than the average rates. 


Weekly Rate Spotlight - Citizens State Bank Offering 4.00% APY Variable IRA

Weekly Rate Spotlight - Citizens State Bank Offering 4.00% APY Variable IRA

Rate information contained on this page may have changed. Please find latest savings rates.

Citizens State Bank of Cadott, WI is offering a Variable IRA (VIRA) rate of 4.00% APY. The Variable IRA requires that you have a checking or savings account at the bank and make at least monthly transfers from one of those accounts into the IRA. There is no minimum transfer amount. The maximum total transfer amount is determined by IRA rules.

Citizens State Bank of Cadott, WI is offering a Variable IRA (VIRA) rate of 4.00% APY. The Variable IRA requires that you have a checking or savings account at the bank and make at least monthly transfers from one of those accounts into the IRA. There is no minimum transfer amount. The maximum total transfer amount is determined by IRA rules.

Variable IRAs

Variable IRAs are like savings accounts in a tax-advantaged IRA account. A variable IRA can either be a traditional IRA, in which income from the account is tax deferred, or a Roth IRA, in which post-tax income grows tax-free and can be withdrawn tax free. The main difference between a Variable IRA and a Fixed IRA is that the interest rate earned on money in a Variable IRA can change at anytime (think of the difference between a savings account and a CD).

A broader discussion of putting deposit money into IRAs can be found here.

Citizens State Bank

The VIRA can only be opened at a Citizens State Bank branch. The bank has four branches located close to Eau Claire, Wisconsin. The bank was founded in 1902. Its assets have remined relatively flat over the past six years, growing from $98 million to $99 million. The bank has a Texas Ratio of 18.76% versus the national average of 20.28%.

If you don't live near a Liberty Bank & Trust branch, BestCashCow can help you find a great IRA rate in your area.

New - Email Rate Updates for BestCashCow Readers

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I hope to eventually also have the weekly rate updates go out via this email service.

Previous Weekly Rate Spotlights

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Weekly Rate Spotlight - Liberty Bank & Trust Offering 1.31% APY Savings Account Rate

Weekly Rate Spotlight - Liberty Bank & Trust Offering 1.31% APY Savings Account Rate

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This week, I'm going to spotlight Liberty Bank & Trust, a 22 branch bank headquartered in New Orleans. Liberty is offering a 1.31% APY savings account with a $50 minimum balance.

It's getting harder and harder to find a savings account rate above 1% APY, but we've found them. This week, I'm going to spotlight Liberty Bank & Trust, a 22 branch bank headquartered in New Orleans. Liberty is offering a 1.31% APY savings account with a $50 minimum balance. That's pretty good considering the highest online rate is 0.95% APY and the average savings rate across the country is 0.20% APY.

Liberty Bank & Trust has a strange branch network, with a cluster of branches in the New Orleans area, a branch in Kansas City, MO, and one in Detroit, MI. View Liberty Bank & Trust's branch locations. This geographic spread is the result of several bank acquisitions, including the purchase of Home Federal Savings in Detroit, Michigan. Liberty has put together a nice video that highlights the bank and its history. The section on surviving and gowing after Hurricane Katrina was especially interesting - 6 of their branches flooded and the rest were looted.

The bank's financials look pretty sound. After spiking to 24% in 2009, the bank's Texas Ratio has dropped to 12.2%. The national average Texas Ratio is 20.28% and the lower the ratio the better (read more about the Texas Ratio). Liberty has just about doubled its assets from $290 million in 2006 to $571 million in 2011.

If you don't live near a Liberty Bank & Trust branch, BestCashCow can help you find a great savings rate in your area.

  • Find other great savings rates in your local area by clicking on the "Savings" tab above.

New - Email Rate Updates for BestCashCow Readers

Users can now register to receive the best bank rates via email every Monday. You can choose to either receive the best rates for banks across the country, or you can receive the best rates for your state. You can cancel delivery at any time and also login to change which product rates you receive for which state. This email service is free. You can register for the service here.

I hope to eventually also have the weekly rate updates go out via this email service.

Previous Weekly Rate Deals

Check back next Monday for a new bank deal. Email any deals you know about to ratedeal (at) bestcashcow.com. Feel free to also share them below. If you're a bank and have a great deal not listed on BestCashCow, register for access and add the deal to the site.

New- Remember, to receive FREE weekly emails updates with the best bank rates for your state, click here to register.

Image: Image courtesy of Stuart Miles at FreeDigitalPhotos.net