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How Much Cash Should I Have on Hand Now?

These three occasions should prompt a discussion with your wealth planning and investment professionals about how much cash you should have on hand.

An illustration showing a person pointing at a collage of financial charts.

“How much cash should I have now?” It seems like a simple question, but the answer can be complicated. Apart from your emergency fund, the amount of cash or liquid assets you may need depends on many factors, including the current state of the market as well as major life events.

“There’s not really a general rule in terms of a number,” says Michael Taylor, CFA, Vice President – Investment Strategy Analyst at Wells Fargo Investment Institute. “We typically say two to three percent of your overall portfolio, or maybe several months’ worth of living expenses, but that number could change depending on your comfort level or what’s going on in the market.”

Taylor and Marcel Hamburger, Vice President – Financial Advisor for Wells Fargo Advisors, say three events should prompt a conversation with your wealth advisor about how much cash to have on hand.

  1. 1. When the market is in flux

    An illustration representing a volatile market.

    “When the economy is volatile, you really want to keep a close eye on cash,” says Taylor. “Right now we’re at the tail end of one of the longest recession recoveries in history, which means that some stocks have gained quite a bit.” Investors could consider rebalancing their portfolios by taking some of those gains and holding them in cash, he adds, to make new stock investments when the market dips again.

    At the same time, interest rates are starting to change in response to market volatility. Taylor says investors should work with their wealth professionals to devise a strategy.

    “You don’t want to park a lot of money in cash if you can earn more by investing in a growing market,” he says. “But cash is a great tool for seizing opportunities to expand your investments when the market is down.”

  2. 2. When you sell or transfer a business or real estate

    An illustration representing the sale of a business or real estate.

    Changes to the tax law can help inform how you should manage an influx of cash from the sale or transfer of a business or real estate.

    “Ask your wealth professionals about the recent tax law changes and what they could mean for your portfolio,” Taylor says. “There are many factors that could trigger certain decisions regarding the timing of a sale or transfer. If the taxes or the market aren’t in your favor, you may want to rethink the timing of the sale or what to do with the funds.”

    Hamburger agrees. “You don’t want to come up short on cash or have to take a hit by selling an asset when the market’s low,” he says. “Talking to a financial pro ahead of time can help you identify the right way and time to proceed.”

  3. 3. When you’re ready to retire

    An illustration representing being ready to retire.

    If you’re planning to retire early, you may still want to continue working, perhaps starting a business, serving as a consultant, or becoming a philanthropist. A report by the Wells Fargo Investment Institute points out that individuals in their 50s and 60s launch new businesses at twice the rate of those in their 20s. The percentage of seniors in the U.S. workforce also is continuing to rise.

    “You want to have enough cash set aside to use when great opportunities arise. This could include a career change or a new venture after retirement,” Taylor says. You might have to dip into an investment account or sell a stock if you don’t have enough cash on hand during those transition periods. “That means you could end up losing money when you can least afford it,” he says.

Events such as an unexpected windfall from a bonus or inheritance should also trigger a discussion with your wealth professionals about your cash needs. Your long-term goals, risk tolerance, and spending or saving habits also affect how much cash you should have on hand.

“Some people can be overly aggressive with the amount of money they want invested, and then their plans are disrupted when they need cash,” Hamburger says. “Others may hold on to way too much cash, and it really hurts their overall earning potential. A wealth planning and investment professional can help you strike the right balance.”

Colleen Marble is a freelance writer based in St. Louis, Mo.

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Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult your tax or legal advisors to determine how this information may apply to your own situation.

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