Rainy day cash – how much is enough?

One of the questions we get asked frequently is how much cash should I keep on deposit? The simple answer is, enough to allow you to sleep at night without worrying. Keep enough cash easily accessible so that you won’t be left short in a financial emergency and you don’t need to panic sell during a market downturn.

During your working years, 6-12 months of salary is generally considered ideal, but as in retirement, there are no hard and fast rules. During your investment review, we can work out the right amount with you. The amount you keep in cash will dictate where you put it, and we can help you manage these reserves.

Working out your cash fund

  1. Emergency fund. This can be used if the roof falls in or your car needs an urgent fix.
  2. Planned expenditure. Are you planning to replace your car, renovate your property or gift your children some money for a house purchase, for example, in the next three to five years?
  3. Planned investment. Only money that you are happy to leave untouched for five years or more should be invested.

We use this five-year parameter because historically, there are more times when the value of an investment in the UK stock market ends higher than it started over five years than there are over three years or one year1.

Cashing in investments

If you decide to cash in any investments, do it sooner rather than later. Don’t wait to see how your funds perform until the last moment. A market fall just before you need the money will have longer ranging consequences than you losing out on any gain between making your decision and when you need the money. But please, feel free to talk through any decision with your adviser before you take action.

 

1Source: FE Analytics, Total Return, GBP£, Rolling 1, 3 & 5 Years (Year End) FTSE All Share Index, 31.01.1985 to 31.12.2020