“How much cash should I have now?” It seems like a simple question, but the answer can be complicated—especially in times of market volatility. Apart from an emergency fund, the amount of cash or liquid assets you need depends on many factors, including the current state of the market and major life events.
“There isn’t really a general rule in terms of a number,” says Michael Taylor, CFA, Vice President – Investment Strategy Analyst at Wells Fargo Investment Institute. “We do say it shouldn’t be more than maybe 10 percent of your overall portfolio or maybe three to six months’ worth of living expenses, but that number could change depending on your comfort level or what’s going on in the market. You should make sure your emergency fund and cash reserves can meet your current needs.”
Taylor and Marcel Hamburger, Vice President – Investment Officer for Wells Fargo Advisors, share five events that should prompt a conversation with your investment and wealth advisors about how much cash to have on hand.
1. When the market is in flux
The state of the market can have an impact on how much cash you should have on hand, how long you decide to hold an asset as cash, or when to convert assets to cash. This can be especially true when you can foresee a large discretionary purchase such as a vacation home or a luxury vehicle.
“Plan for those purchases, or defer them so you don’t have to liquidate assets at a loss during market uncertainty,” Taylor says. “In addition, you may also want to adjust your cash reserves to help protect you until the market recovers.”
Adds Hamburger: “The far-reaching impacts of the coronavirus in 2020 have created some very sudden pronounced moves in the markets. In my view, it is imperative that investors stick with their cash reserve plan. You don’t want to come up short or have to take a hit by selling an asset when the market’s low.”
2. When your job status may change
If you’re contemplating a career move such as starting a business, retiring soon, or facing a possible layoff, consider meeting with your wealth advisor. “If you don’t have enough cash on hand during those transition periods, you might have to dip into an investment account or sell a stock at an inopportune time,” Taylor says. “That means you could end up losing money when you can least afford it.”
3. When your marital status is about to change
Getting married? Tying the knot costs an average of $30,000, and that doesn’t include a honeymoon or the expense of setting up a household. A divorce can set you back as well, thanks to legal fees, asset division, and other costs. That means you need enough cash on hand to weather the transition from being single to getting married or vice versa. “Talking to a financial pro ahead of time can help you identify how much on-hand cash you need,” Hamburger says.
4. When your child is ready for college
Today, the average cost of attending a private college for four years is nearly $200,000. “It’s important to plan so that you have enough liquidity to pay those tuition bills when they arrive,” Taylor says.
5. When you receive a windfall
If you receive an inheritance, a large bonus, or a generous financial gift, ask your financial advisor about investment options relative to the amount of cash you should have in your portfolio. “If that money stays in savings or short-term CDs, it can’t earn to its full potential,” Hamburger says. “Too much cash can really put you behind the eight ball.”
Your long-term goals, risk tolerance, and spending and saving habits also affect how much cash you should have on hand. A wealth planning and investment professional can help you strike the right balance.