How Much Cash Should You Keep?
Keeping cash under a mattress may be an outdated idea, but it’s important to include cash or cash alternatives in your financial strategy. The amount of cash you need — and where to keep it — depends on your situation. To some extent, it’s a balancing act between short-term needs and long-term goals.
Emergency Funds
A typical guideline suggests having an emergency fund equal to three to six months of expenses, so you can pay bills in the event of a loss of income and meet unexpected expenses such as medical care, car repairs, or a new roof. For this purpose, a traditional savings account or a bank money market account (a savings account with limited check-writing privileges) can be helpful because the funds are readily available.
Money Market Mutual Funds
Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a stable value of $1 per share and can generally be liquidated fairly easily. Money market funds are typically used as the “sweep account” for clearing brokerage transactions, and investors often keep cash proceeds in these funds on a temporary basis while looking for another investment.