How much cash to keep in the bank?

Let’s first explore where you should stash your money beyond your checking account and the appropriate allocation for each account.

The linchpin is automating your finances. We’re obsessed with automating savings, and for good reason. If you doubt us (sad!), take heed of behavioral economist Shlomo Benartzi, who asserted in Business Insider last year, “If people have to actively think about saving, then they probably won’t do it.” Now that you know you should automate, here are the types of savings you need to automate for:

Emergency Fund

This is a non-negotiable. It’s what often comes to mind when HENRYs mention “cash in the bank.” However, they’re not exactly the same thing. An Emergency Fund is just that—a fund for emergencies, not for routine expenses like credit card payments or Mexico vacations. It’s your safety net for unexpected job changes, illnesses, or other unforeseen life events.

We’re a bit different. While most financial experts will endorse $10k savings or 6-12 months of income for an emergency fund, we aim for no more than three months’ worth of fixed expenses. $10k is an arbitrary number, and 6-12 months is too much, that money could be going towards short and medium-term goals (Scottsdale trip, anyone?).

An emergency fund turns a crisis into an inconvenience.

Cash parked in a bank, even a top-notch online bank with a high-interest rate, won’t outpace inflation in the long run. This is why high-yield savings accounts are beneficial but have limitations. Important Note: Your Emergency Fund doesn’t require constant additions unless your fixed expenses change. It’s a primary goal to work toward. Once you reach it, stop adding and start saving for other objectives. Revisit this figure annually—no more, no less.

Short-Term and Mid-Term Goals

Short-term goals encompass anything you plan to accomplish within the next 1-3 years—like a trip to London (UK), purchasing an engagement ring (you know who you are, or don’t), or making a down payment on a place. If it involves a substantial sum and occurs within three years, it’s a short-term goal. Open a few more savings accounts, label them with names corresponding to each goal, and automate. This money will be used soon, so there’s no room for error or market downturns. Avoid investing your short-term goal funds.

Medium-term goals stretch beyond 3 years but fall before retirement. Examples might include buying a house or getting married. The line between short and medium-term goals can blur and vary between individuals and life stages. Should you invest these funds? It’s difficult to say and there are a variety of factors that must be considered.

Most people have fewer medium-term goals because they lack concrete plans that far ahead. Consequently, you can invest this money in a more liquid option than your retirement account. To clarify further, let’s break it down.

Don’t be fooled by TDs (Term Deposits) and Money Market accounts. Large banks might suggest these for wedding or home savings, but here’s our stance: TDs and Money Market accounts are suboptimal. The interest rates on these accounts aren’t significantly different, and we’re not convinced they’re the best place for your money. Moreover, they often entail minimum balances, like $10K or even $25K, and restrictive time frames for investments, often locking in money with early cashout penalties. Avoid accounts laden with such requirements.

If your goals extend beyond three years, consider investing in the stock market, which you can also automate. This involves putting money into stocks, bonds, ETFs, or mutual funds—different from your retirement account. This allows you to sell at any time without incurring penalties when you need those funds for your goals. Bear in mind that investing can contain tax implications, so do your research or consult a financial advisor as you embark on your investing journey. Which account we choose is almost as important as the investments we decide.

Retirement

Your retirement account should not reside in a TD or Money Market account. These accounts won’t keep pace with inflation, eroding the long-term benefits of market investments. Now that you’ve built an Emergency Fund, automated savings for short and medium-term goals, and started saving for retirement, how much cash should ideally grace your checking account?

Cash

This is your working capital, the money you use to cover monthly expenses—rent, utilities, groceries—and whatever remains for leisure activities like date nights, movies, theater tickets, or weekend getaways. This amount should align with your fixed expenses, but it’s not static.

Your expenses can fluctuate from month to month, which is why we recommend automating savings and keeping the leftovers from each pay period in your checking account to cover day-to-day expenses. You might realize that when you automate for all your other goals, you’re left with insufficient funds to meet your bills. This can be a harsh wake-up call, indicating the need to reassess your lifestyle and ensure you’re living within your means, avoiding lifestyle inflation.

Here’s a general, but not a one-size-fits-all suggestion: For most HENRYs, we recommend maintaining a cushion of no more than $2-3K in your checking account. This accounts for variations in paycheck timing and bill due dates, preventing any unexpected surprises. If your cushion exceeds $3K, it’s time to allocate that extra money to a short-term goal or put it to work for a medium or long-term goal. Alternatively, you could treat yourself to a lifestyle upgrade without guilt.

Need Expert Advice? We’re Here: The amount you should keep in the bank hinges entirely on your unique life circumstances. It takes some effort to figure out, and there’s a learning curve. Even financial professionals aren’t infallible; we’re all human. That’s why we adore tools like automation—it simplifies the process. And if you desire professional guidance to outline your goals and the most efficient strategies to achieve them, that’s precisely the purpose of ARC Wealth. It’s time to take charge of your financial well-being.