Why You Should Keep 10–25% Of Your Networth Liquid
Contrary to popular trends, cash is an helpful asset
To many, keeping too much cash is like burning your money since inflation constantly rises.
However, holding a specified amount of cash is a prudent way to hedge your invested money.
Cash can’t lose more than 3–4% per year or the average annual inflation rate.
Your invested money, on the other hand, could lose double digits.
If you can’t stomach (or afford) the losses, higher cash reserves might be for you.
According to Smart Asset:
“Studies indicate that millionaires may have, on average, as much as 25% of their money in cash.”
Not to say you should live like a millionaire, but many of their financial habits are beneficial.
How To Keep Your Cash Reserves Growing
Instead of sitting your money in a traditional savings or checking account, other options could include:
CDs
Money Markets
High Interest Yielding Savings Accounts
Low Risk/High Liquidity Investment Accounts
The theme for these types of accounts is they are:
Low risk
High liquidity
Earn a modest rate of return
The Emergency Fund
Your emergency fund is a perfect example of funds you’d want to keep in these accounts.
In an emergency, you’ll need money quickly (high liquidity), usually in a money market or high interest-yielding savings account.
You don’t want all of your money to be tied up in low-liquidity investments during times of need.
Markets Fluctatuate — Keep A Watchful Eye
If you’re nearing retirement age or desire to invest or save less aggressively, having a percentage of your net worth in cash reserves will help offset the risk of your other less liquid investments.
If you’re an emotional investor, having a percentage of your net worth in cash can save you stress.
I ignore market trends because I’m a long-term investor, have time on my side, and don’t get emotional about dips. But investing your money in lower-risk financial opportunities is worth exploring for those who have less time, are swing or short-term traders, or find themselves getting emotional.
How Much Should You Put Aside In Cash Reserves?
This number will look different for everyone. It will depend on your comfortability, net worth, and goals.
Once you define these things, you will have a clear idea of your next move.
Having too much invested in cash reserves can limit your financial opportunities and growth.
Having too little invested in cash reserves can significantly impact your wins and losses.
Some recommendations say to put 10–25% of your net worth.
The bigger your net worth, the more or less reserved you might become with your money.
Some people become less concerned about losses.
Others become more concerned about losses.
Having around 10% of your net worth in low-risk and high-liquidity vehicles is a good starting point.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.