Here’s How Much Cash You Should Actually Have on Hand
Managing your cash effectively is the key to a successful long-term financial plan. When we say “managing your cash effectively”, we’re saying that you should have just enough cash in just the right places.
This is especially true when inflation numbers are rising like they have been recently – the higher the inflation rate is, the more quickly it eats away at the purchasing power of our cash over time.
Here, we’re sharing just how much cash you should have on hand (and where you should put it).
- Your current account should have 1 to 2 months' worth of expenses. Any more than that, and you're losing your cash's value to inflation.
- Your emergency fund should have about 6 months' worth of expenses. We recommend keeping it in a low-risk, liquid investment, such as our cash management portfolio.
- For upcoming expenses, such as a wedding or a house deposit, consider keeping your funds in short-term investments.
How much liquid cash should I have in my current account?
You should only have 1 to 2 months' worth of cash in your account
Current accounts often do not earn much interest, so anything more than what you’re spending in the short term is actually decreasing in value because of inflation. So, how do you protect the value of your money? You should only use your current account to hold enough cash so you have sufficient funds on hand to cover your monthly expenses for the next 1 to 2 months, as having too much cash may be a bad thing.
Know your expenses and budget for them
To make sure you have enough cash on hand for that 1 to 2 months, plan ahead by looking at your bills (rent, utilities, phone, taxes, mortgage) and any purchases you anticipate (from meals to a vacation you’re taking this month, for example). You don’t need more than what you’ve budgeted for the month in your current account.
If that small amount makes you nervous, go ahead and add a little buffer, but keep in mind that the bigger the buffer, the more you're likely to overspend. How much your buffer should be comes down to how disciplined you can be versus how risk-averse you are.
Put the rest of your money to work
In short, the only money on hand that shouldn’t be put to work is what you’re allocating yourself to spend that month, which should be in your current account so you can easily withdraw. Any money you're not spending in the next 1 to 2 months can be put to much better use in an interest-accruing account or investment product so that you can reach your financial goals sooner.
How much liquid cash should I have in my emergency fund?
We recommend you keep 6 months’ worth of expenses in a liquid, interest-earning account
Because you (hopefully) don’t need to tap into the cash in your emergency fund often, there’s likely a good chunk of time in which this money you have can grow so that it doesn't lose its value to inflation. How you manage your emergency funds is crucial. To make sure your emergency fund's value keeps up with inflation, you should ensure it's not in a savings account. Instead, you want your emergency fund in a liquid, interest-earning account where it can grow as much as possible.
This can be a:
- Savings account
- Money market fund
- Any other low-risk, liquid investment
Here's what you need to know when evaluating the options for your emergency fund:
Bank savings accounts often have fine print on the advertised interest rates
Many banks advertise an attractive rate on their savings accounts. But the reality is that only a portion of your balance is actually eligible for this advertised rate, and often only eligible for a specified period of time.
For example, if your emergency fund of $100,000 SGD is in your savings account, it's most likely that that entire $100,000 SGD isn't earning the rate; instead, it's likely earning a tiered earnings rate, meaning you tack on small interest increments with each dollar you have, up to a certain balance threshold.
So, if the bank is offering a return of, say, 3.8%, you most likely aren’t earning 3.8% on the full $100,000 SGD. Maybe you're earning 3.8% on $15,000 SGD, and then a lower interest rate on the rest. Ouch. Make sure you read the fine print.
Fixed deposit accounts aren't liquid
Fixed deposit accounts often charge a penalty for withdrawing your money before it reaches maturity. The key with the emergency fund is to have the liquidity that you can access whenever life throws you a curveball.
Low-risk, liquid investments can protect your cash from inflation
The key to having an effective emergency fund?
- Make sure it doesn't wither in a savings account.
- Have just enough in your fund so you'll never have to dip into your medium to long-term investments in an emergency. Doing this could compromise your long-term financial goals. That's why we say your emergency fund should cover at least 6 months’ worth of expenses.
- Make sure that it's low risk. Here’s how: you should never expose your fund to unnecessary volatility that could risk your cash just when you need it.
Our 3 cash management portfolios, StashAway Simple™, Simple Plus and Simple Guaranteed let you earn competitive returns on your cash. Simple hasn’t had a single week of negative returns since launch, Simple Plus offers a higher potential for returns but also carries slightly higher risk in comparison to Simple. And Simple Guaranteed is quite straightforward - the returns are guaranteed. Find out their latest projected rates of return here.
All three have no minimum balances, investment requirements, tiered earning structures, and whatever else the banks have come up with to make it painful to manage your cash. You can put your cash to much better use with StashAway and withdraw any amount of your funds at any time without penalties (except for Simple Guaranteed which has a lock-in period), enabling you to have cash on hand to meet your needs.
Where should I keep my funds for an upcoming expense?
Putting a downpayment on a house soon? Paying for your wedding? The last thing you’d want before getting ready to make those exciting payments is for the money to drop in value because of a dip in the market. But that doesn't mean that you should keep this money in cash.
Keep your fund in short-term investments
Instead of keeping these funds in cash, we recommend that your short-term investments (0 to 3 years out) are in low-risk products that earn a return (e.g. don’t put your downpayment in a current account until you’re about to transfer it, and don’t keep it in a risky portfolio, either). Liquidity and low volatility are critical when it comes to short-term investments.
Consider goal-based investing for your upcoming expenses
Our goal-based investments manage your risk as you reach the timeframe you indicated. So as you get closer to your goal, your potential downside decreases so that you have the money you need to make that purchase.
While we manage your risk exposure, our investment framework also seeks to maximise your returns. The result is that you earn comparable returns at a fraction of the risk that you’d have to take elsewhere: Since 2017, our lowest-risk Investment Portfolio has earned annualised returns of 1.6% (as of April 2022).
Remember to keep your funds liquid
For discerning individuals, you may now wonder: should the cash I have remain liquid? We can’t emphasise the importance of liquidity enough. Make sure that whatever vehicle you select, you can easily access your money when you need it and determine how much to withdraw. That’s why we don’t have any lock-up periods, and you can withdraw anytime for free.
Here's what you should do with the rest of your money
The rest of your money needs to be working for you even harder. We're talking about your medium- to long-term goals that need to take advantage of compound interest to reach them.
If you have any of those funds in cash, you’re missing out on potential returns that could help you reach those goals sooner, as well as give you more flexibility to do more with them. If there’s money that you don’t plan to use in the next few years and isn’t part of your emergency fund, it should be invested.
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