How Much Cash Should You Have on Hand?

Welcome to this week's edition of The Weekly Trail Report, where we share,

1 Story, where real stories of architects and engineers meet tailored financial strategies,

1 Actionable Tip, to provide actionable insights and guide you towards financial success,

1 Financial Term, to demystify key concepts and empower your decisions.

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1. Story: Amy Has Too Much Cash

How much cash should you have on hand??

This is a common question, and an important one to know the answer to.?

It’s one of the first financial questions I worked through with Amy when we met.?

Amy had a successful career as a structural engineer, and while she had never hired her own advisor, she had made sure to start saving money early on, and meet with the advisor who managed her company’s 401k anytime it was offered.

?

When we first sat down, cash was the first thing she asked about. “How much cash is too much?”

“Well, that will depend a lot on you—your goals, the rest of your finances, etc.” I replied.

She was in her 40’s and had been consistently contributing to her company sponsored 401k since she had started work in her 20’s. As her income grew, she continued to be smart with her money and had quickly reached the point where she was easily meeting the contribution limits for the 401k, with money still leftover at the end of the month.?

“Everything that’s leftover just gets dropped into my savings account. It’s over 300k now, and I started to worry that money should be going somewhere else,” she said.?

“Okay, it sounds like you're fully set in other areas of your finances. What is your timeline for retirement?” I asked.?

“I think if I could retire in the next 5 years that would be amazing,” she answered, “but I’m prepared to be more reasonable and continue working for the next 10 if needed”.

“That’s a reasonable timeline,” I replied, “what are your general feelings about investing the money that is in savings?”

“That sounds like the smart thing to do—the only reason I haven’t done that yet, is because I’ve reached the contribution limits for my 401k.”

“There are a few ways we’ll be able to invest the money,” I replied, “you don’t have an IRA yet, so we can set you up with one of those, and you can also invest money in a normal brokerage account.”

Together we went through her expenses to determine how much cash she should have on-hand for emergencies.

Here’s how it shook out:

1. $25,000 (2 months of expenses) stayed in her savings account
2. $75,000 (6 months of expenses) went into a money market account (emergency fund)
3. The remainder went into a brokerage account so it could be invested but still easily accessible.?

Lastly, we set up an IRA, and a regular schedule for contributions to that account in addition to her company 401k. Having one more tax-advantaged retirement account would further help to set her up to retire in the next 5-10 years.?

“This is a relief,” Amy said when she left, “I knew that all that cash should be doing more than that 4% interest I was getting.”

2. Actionable Tip: Invest Excess Cash

Once you've established a solid emergency fund and are well on your way to saving for retirement through tax-advantaged retirement accounts, it's time to put any remaining cash to work through a brokerage account.

As a diligent saver, it can be easy to forget about cash piling up in your savings account. All that money might give you a sense of security, but you are losing out on opportunity cost.

Brokerage accounts offer a lot of flexibility as well as the benefit of being taxed as capital gains versus ordinary income. By investing this money for the medium term, you can make a higher return than a savings account while also maintaining the ability to easily withdraw the funds with no penalty versus a retirement account.

Brokerage accounts allow you to invest in a wide range of assets, such as stocks, bonds, mutual funds, and ETFs. Start by determining your investment goals and risk tolerance. From there you can build a portfolio that meets your goals.

3. Financial Term: Financial Trade Off

Every financial decision involves a trade-off, even the choice to do nothing. It's easy to delay important decisions or stick with choices made years ago without reassessment. In finance, there are countless ways to achieve the same objective.?

The key question is:?

Which method is best for you?

What trade-offs are you willing to make to reach your goals?

Understanding the pros and cons of your financial choices is crucial to ensuring your money works as hard as possible.?

Don’t settle for subpar opportunities.?

Continuously optimize your assets to maximize the return on your efforts and achieve the best possible outcomes.

Happy Trails,

Ryan

Disclaimer: We employ fictional characters to illustrate financial concepts faced by individuals in the architecture and engineering industry. Any resemblance to real persons, living or dead, is coincidental. While the stories are inspired by our experiences, the specific details, circumstances, and outcomes mentioned are entirely fictional and created for educational purposes only. Real client information is strictly confidential and never disclosed without explicit consent. Our aim is to provide relatable examples for educational purposes, respecting the privacy and confidentiality of our clients.