“Cash is king.” “Cash is trash.” You’ll hear both of these phrases, and both have merit. Working from the premise that you should maintain an emergency fund (several months’ worth of expenses) and invest what’s left, let’s take a look at the key situations where holding more cash can be beneficial.
Buying a house
Saving for the purchase of a home is perhaps the most common reason why you would build a bigger cash pile. The down payment can take years to accumulate, and it’s important to hold these funds in a high-yield savings or money market account for easy access when you are ready to purchase a home.
Saving for another large purchase
When purchasing another vehicle or a new piece of furniture, it may be prudent to save cash in an account separate from your emergency fund to ensure you’re not taking on debt when you buy, and to avoid dipping into your rainy-day stash.
Income is inconsistent
Perhaps you are not a W2 employee, your hourly work is inconsistent, or your income is simply variable like working on commission, holding more cash can provide the necessary funds to weather any storms that arise from not receiving a consistent paycheck. For peace of mind, you would build a bigger emergency fund than is typical – say, 12-18 months of expenses or more depending on your circumstances.
Small business owner
Business owners tend to have unique cash needs that a salaried employee would not. This is not an area of expertise for me, but being able to meet overhead costs and surprise expenses prompts many owners to protect against business risks by maintaining sufficient liquidity.
Receiving a windfall
Receiving a financial windfall can be a tremendous lift to your finances, but knowing what to do with it and where to park the funds can take a little patience and due diligence to get it right. Don’t rush any purchases or novel investments. Take your time with the blessing you have been given.
High monthly expenses
Higher monthly expenses, even with higher-than-average income, may lead the conservative household to maintain a bigger buffer. This is especially true if you meet one of the other circumstances listed previously, like being a business owner or relying on large commissions.
What else has you holding more cash? Let us know in the comments.
Discover more from The Budget Brainiac
Subscribe to get the latest posts sent to your email.
