It feels good to see a high balance in your checking account. That number represents safety, security, and the ability to handle whatever life throws your way. If you feel hesitant to move that money into the market or lock it away, you aren't alone. Money is emotional, and keeping cash close is a natural human reaction to uncertainty. Let's look at how we can honor that need for safety while making sure your money is actually working for your future.
Why we tend to hold too much cash
There are valid reasons why many of us keep our assets liquid, and most of them stem from a lack of clarity about our broader financial roadmap.
The emotional connection
Money is never just math. The psychology of money drives us to hold onto cash because it alleviates stress. Whether you crave a feeling of safety or want to reduce anxiety about the future, a cash cushion satisfies those emotional needs.
Missing the roadmap
The biggest reason people hoard cash is simply not knowing their number. Without a clear roadmap that defines exactly what you need for today, tomorrow, and the future, it's impossible to know when you've saved "enough."
Analysis paralysis
Sometimes we know we have too much cash, but we freeze because we don't know what to do next. You might face conflicting priorities or feel unsure about trade-offs. This uncertainty leads to inaction, and inaction leads to a bloating bank account.
Market jitters
When headlines scream about recessions, rising interest rates, or inflation, it's tempting to stay on the sidelines. We tend to be more cautious during uncertain times, which keeps our money out of the market.
Life in transition
If you're buying a home, starting a family, or changing careers, you naturally want liquidity. This isn't a bad decision. However, you need a strategy for when and how to put that capital back to work once the transition settles.
The emergency fund rule of thumb
The primary job of cash is to act as your emergency fund. This is the money that protects you from the unexpected, like a car repair, a health issue, or a job loss. It acts as a safety net that prevents you from relying on high-interest debt when things go wrong.
For most people, the rule of thumb is to keep three to six months of expenses in cash.
Your specific number depends on your life. If you have a dual-income household and stable jobs, you might lean toward three months. If you're a single-income household or value extra peace of mind, you might aim for six months. Keep this money in low-risk or no-risk vehicles like savings accounts or certificates of deposit (CDs) so it's there the moment you need it.
Planning for short-term goals
Once your emergency fund is set, you need to look at what you're saving for. The right amount of liquid cash depends on your goals.
The 2-to-3 year window
If you have a goal coming up within the next two to three years, that money should be in cash or easily accessible assets. You don't want to risk this money in the stock market because you'll need it soon. This includes funds for a new car, home renovations, or a down payment.
Major life events
Weddings, new babies, and home purchases come with excitement and price tags. It's smart to have extra cash on hand to cover the upfront expenses and the inevitable "extras" that pop up during these transitions.
The opportunity fund
Cash gives you options. If you're thinking about a career change, moving to a new city, or taking a sabbatical to travel, having extra liquidity can be your ticket to freedom. It allows you to capitalize on opportunities that align with what truly matters to you.
How to make your cash work harder
Even though cash is a safety play, you shouldn't let it sit idle. During periods of high inflation, a reactive strategy can drag down your finances. Here are a few ways to be proactive:
- High-yield savings accounts: These are great for emergency funds. You earn more interest than a standard checking account, but the money is still ready when you need it.
- Certificates of deposit (CDs): If you have a goal that is 6 or 12 months away, a CD can offer a slightly higher rate. Just remember that early withdrawal penalties apply, so plan accordingly.
- Series I savings bonds: To protect purchasing power against high inflation, Series I bonds can be a strong solution for goals at least 12 months out. Note that you cannot sell them for one year from the date of purchase, and there are annual purchase limits.
Cash and your investment timeline
Your cash position should evolve as you move through different stages of life. Here is how to view it based on your timeline.
More than 5 years to retirement
When you have a long time horizon, cash shouldn't be a major part of your investment strategy. It's a low-risk, low-return asset. Over long periods, holding too much of it means your long-term returns will likely be lower than you think.
Less than 5 years to retirement
As you get closer to retirement, it makes sense to build a larger cushion. You have big decisions ahead, and having extra liquidity provides flexibility and peace of mind during the transition.
In retirement
Once you retire, cash becomes a tool for income. A reasonable target is 12 to 24 months of expenses in cash. This depends on your income sources and family situation, but it ensures you can cover your lifestyle without being forced to sell investments during a market dip.
Strategies for excess cash
If you've crunched the numbers and realized you're holding too much cash, it's time to put it to work. Here is how to get off the sidelines:
Prepare your mindset
Market volatility is normal. Historically, markets have recovered from downturns, and investors who stay the course tend to be rewarded over the long term. Remind yourself that volatility is the price of admission for long-term growth.
Use dollar-cost averaging
You don't have to jump in all at once. If you have an extra $24,000, you could invest $2,000 per month for a year. This smooths out your entry price and reduces the fear of investing at the "wrong time."
Diversify
Split your excess cash between stocks (higher risk and growth potential) and bonds (lower risk and stability). This balances your portfolio and smooths out the ups and downs.
Get a roadmap
The best way to deploy cash is to have a comprehensive financial roadmap. This ensures you aren't leaving money on the table and helps you decide exactly which account types to use and how much risk to take.
The Facet difference
At Facet, we don't believe in charging you a percentage of your assets to give you advice. We believe that how you use your cash is just as important as how you invest your portfolio. Our membership model gives you access to a team of CFP® professionals who look at your full financial life, from your emergency fund to your retirement accounts, for a flat, affordable fee. We act as a fiduciary, meaning we prioritize your best interests, helping you build a life that reflects your values, not just your net worth.
