How Much Emergency Cash Should You Have On Hand?

People often wonder about how much cash they should have on hand in a “rainy day” fund. It’s a fair question and depends on many factors.

According to Bankrate's 2024 Annual Emergency Savings Report, 27% of Americans have no emergency savings. The Federal Reserve suggests roughly half of Americans have 3 months in emergency savings.

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Questions To Consider

How old are you?

What are your current sources of income?

How dependable is your income?

How is your job stability?

How much do you have saved in other liquid assets (stocks, bonds, mutual funds in taxable accounts)?

What is the amount of your monthly expenses?

What amount do you currently have in cash reserves?

Are you planning on a large expenditure within 12 months?

What is your current credit card balance?

What is your risk tolerance?

While not an exhaustive list, these questions can help you gain clarity on the ideal amount of cash reserves.

Let’s walk through a few cases that may provide some guidance for your own personal situation.

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The Case for 3 Months of Reserves

Working professionals that have a dependable and stable income, such as a college professor or a surgeon, may not worry about covering a short-term emergency need. It is less of a concern to have large cash positions.

A younger couple or a single person may not have many expenses. Perhaps they are highly earning and do not yet have children. This may be a case for keeping less cash on hand.

Wealthy individuals may be prone to more risk-taking, and they might be inclined to keep less cash. They also might feel that they have enough liquid holdings in taxable accounts that could be easily and quickly converted if needed.

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The Case for 12 Months of Reserves

Retirees often have closer to 12 months on hand because they don’t want the funding of their upcoming years’ worth of expenses to be subject to market movements.

Working executives and professionals that have volatile incomes or may be worried about a possible job loss, such as a salesperson or a tech employee, may prefer to have more cash saved up. Not only is the purpose of the cash to cover emergency bills, but it acts as a buffer to smooth out months where cash flow is lower, perhaps in between bonus periods.

If you are expecting a large expenditure in the next 12 months, such as a medical expense or vehicle purchase, it may be wise to keep more cash on the sidelines. Another example is a tech executive who has RSUs or stock options vesting, and they need to plan for covering the total tax bill.

Risk tolerance also plays a role in the decision. People that are worried about economic, market, or political events may prefer a larger cash position. It helps reduce anxiety and stress. But this should not be an excuse for market timing.

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Should My Cash Be Held as Cash Dollars or Cash Equivalents?

Let’s say you decide to maintain an emergency cash reserve of $50,000, whether that represents 3 months or 12 months. You certainly could keep all the cash in a savings account and/or a money market account, which may generate a slightly higher yield. 

But many people also like to keep a part of that total amount in cash dollars. For example, you may keep $10,000 in your safe at home. If for some reason the bank is closed or technology isn’t working properly, it’s convenient to be able to get your hands on the cash quickly and easily!

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What is the proper amount of cash reserves for you? Well, it depends.

Consider the questions above as a good starting point. These will help guide you to the decision that is right for you. And be sure to consult your financial planner!

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The foregoing content reflects the opinions of TwoTen Planning and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as financial, legal, tax, or investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee or assurance that diversification, strategies based on Nobel prize-winning research, or any investment plan or strategy will be successful.

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