How Much Cash Should You Actually Be Holding?

Written by the William Allan team · Reviewed by Jason Crawshaw, CPA · 2026-07-20

Most financial questions people bring us are about what to buy. This one is the opposite, and it comes up more often than any of them: how much money should be sitting in the bank?

It is a harder question than it sounds, because the honest answer is that cash is doing a job, and you cannot size it until you have named the job. The three jobs cash does Operating cash. The money that runs the month. Mortgage, groceries, the car payment, the irregular bill that shows up in a quarter when you forgot about it. This balance is not an investment decision. It is a plumbing decision, and it should be sized to your actual spending rather than a number that felt comfortable years ago.

Reserve cash. The buffer against disruption. A job loss, a roof, a medical event, a family emergency two states away. The common guidance is three to six months of expenses, and like most common guidance it is a starting point rather than an answer. A household with two stable incomes in different industries has a different exposure than one with a single income in a cyclical field, or one where income is commission-based and lumpy.

Earmarked cash. Money with an assignment and a date. A down payment in eighteen months. A tuition bill in August. A planned renovation next spring. This money should not be invested for growth, because the horizon is too short to absorb a bad stretch, and the entire point is that it needs to be there on a specific day.

Those three are different in kind. Blending them into one balance is how people end up either short in an emergency or sitting on far more cash than the plan requires. The cost of holding too much Cash feels like the absence of risk. It is closer to a different risk, and one that does not announce itself.

Money that sits for years while prices rise loses purchasing power quietly. There is no statement showing a loss. The balance is the same number it was. What changed is what that number buys, and because it happens gradually, it rarely triggers a decision.

That is worth stating plainly and then leaving alone, because the opposite error is just as real. The cost of holding too little

A household without a reserve does not simply feel stressed during a disruption. It is forced to make financial decisions on someone else's timeline. Selling investments in a bad month because the alternative is a missed payment. Taking on high-interest debt. Pulling from a retirement account and absorbing whatever taxes and penalties come with it.

An adequate reserve is what allows the rest of the plan to be left alone during the exact period when leaving it alone matters most. It is not idle money. It is what buys the ability to be patient. The balance that stopped being a decision The pattern we see most often is not a household that got the math wrong. It is a household that never revisited it.

A cash balance gets set during a specific period, often a tight one or an uncertain one, and then simply persists. Income grows. The mortgage gets refinanced. Kids finish school. The car gets paid off. None of those events prompt a review of the cash balance, because nothing forces one. Years later there is a number sitting in an account that reflects a life the household is no longer living.

Sometimes that number is too small for current expenses. Often it is considerably larger than the plan calls for, and the excess has no assignment at all.

How to work through it

What does a normal month actually cost, not what do you assume it costs? How stable and how predictable is the income behind it, honestly assessed? What is coming in the next two years that you already know about? Which portion of the balance has a job, and which portion is simply there?

That last question is usually the productive one. Most people can identify their operating and reserve needs fairly quickly. The interesting conversation is about what is left over, and where it belongs given everything else in the plan.

Where this connects

Cash sizing is not a standalone question. It interacts with how much risk the rest of the portfolio can reasonably carry, with the tax treatment of where money sits, and with what the plan needs to fund and when.

A household with a well-sized reserve can generally take a more considered long-term approach with the rest, because the portfolio is not being asked to double as an emergency fund. A household without one is exposed to selling at the worst moment, no matter how well the portfolio itself is constructed.

If the balance in your account is the number it is because of a decision you made under different circumstances, that is worth a look.

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