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  • Writer's pictureMark Fonville, CFP®

How Much Cash Should You Have On Hand?

Updated: Nov 1, 2023

Happy New Year! At the start of each year, we often dream up new visions for what we want our lives to look like, and those dreams take the form of resolutions. These resolutions allow us to reflect on the things in our lives that we would like to change.

Have you made any resolutions this year?

If not, you should put savings at the top of the list. You may be thinking, why should I make a resolution that won’t last?

But the reason that about 80% of resolutions fail is because they aren’t rooted in intention. Without intention, or a distinct “end goal” that makes your resolution relevant, it’s tough to find the motivation to follow through.

So, don’t simply say you want to save more this year. Instead, put an intention or motive behind it and think about why you’d like to save.

There are so many different ways to save, and each has its own “why” behind it.

Building an Emergency Fund

Picture this: A frost covered night in the thick of January. The brisk wind forces the snow to harden into ice, even the door seems to shake each time you open it. The pipe inside your crawl space bears the brunt of the wind’s rage and begins to freeze. Unable to withstand the pressure caused by the ice’s expansion, the pipe bursts.

Water damage holds the largest expense when a pipe bursts, leaving you responsible for a $5,000 or more clean-up fee. What do you do now?

This is where an emergency fund comes in. Designed to live in a separate, high interest account, an emergency fund is there to help pay for unexpected costs.

Emergency funds are a safeguard against numerous curve balls life can throw your way such as:

  • House repairs

  • Car repairs

  • Long-term injury

  • Surgery

  • Unexpected travel for ailing family members

  • Loss of employment

An emergency fund is the physical manifestation of the phrase “just in case.”

Building one is imperative so that when an emergency does occur, you aren’t forced to take out loans, max out your credit line, or go into debt.

What can you use an emergency fund for?

How Much Cash Should You Have on Hand?

Since emergency funds help ward off debt in unfavorable circumstances, we often advise clients who are still working to keep anywhere from 6-12 months of living expenses in the account. If you have a family to support, have only one earner in the family, or have a career that may take a long time to find a job replacement, you may need even more than that.

If you are retired, we often advise clients to keep closer to 18 to 24 months of living expenses, if possible. This can help mitigate the risk of running out of money when taking portfolio income withdrawals during stock market declines.

Think through your fixed living expenses including:

  • Rent/mortgage

  • Food

  • Utilities

  • Healthcare and insurance premiums

How much do you spend on these expenses per month?

Use that number to calculate your projected expenses and work toward that goal. If you unexpectedly lose a job, for example, you will want to have a contingency plan with savings to cover your house payment until you are able to secure additional work.

Emergencies are not easy, often wrapped in stress and anger. With an emergency fund, you at least give yourself some breathing room to deal with the situation without having to immediately panic about your finances.

What an Emergency Fund is NOT For

We have talked a little bit about what an emergency fund is for, but it is also important to talk about what it isn’t for.

  • Planned large purchases

  • House

  • Car

  • Education

  • Vacation

  • Recreational spending

Avoid the temptation to dip into your emergency fund for personal spending. You have spent a lot of time building the fund, discipline yourself to save it for when you actually need it.

It's also important to remember that your emergency fund isn't intended to cover business expenses. If you own your own business, keeping your finances separate is a huge challenge. Do not use your emergency savings for business costs.

Emergency situations can devastate your finances if you are not prepared for them. Once you have established an emergency account, keep it separate from your other financial obligations. By separating it, you will be less tempted to draw money from that account for non-emergency purposes.

Where Should You House Your Account?

Emergencies happen unexpectedly and often at the most inopportune times. That being said, you want to have your emergency savings as liquid as possible. Liquidity simply means the rate at which your money can be turned into cash.

There are many prevailing theories as to where you should store your emergency cash, but the truth is it shouldn’t ever be housed anywhere except a traditional or high-yield savings account. Investing your emergency fund puts it at risk based on stock market volatility, or even normal portfolio fluctuations over time. We want you to be able to access your funds in case of an emergency - and that means keeping them secure in a low-risk savings account.

One of the simplest ways is to open up a separate savings account through whichever bank you like the best. Opt for one that gives you the best interest rate. While many savings accounts are earning less than 0.50%, there are a handful of options that pay considerably more interest.

High interest savings and money market accounts you may consider include:

Savings and money market accounts are low risk, your money is fully accessible and liquid, and yields are making a comeback, creating a great option for your emergency savings account.

There are many ways for you to save money. An emergency fund is there to protect you and your family when the unexpected occurs. No one knows what 2019 will bring, so try and be prepared for whatever tricks it has up its sleeve.

Beyond Emergency Savings

Unfortunately, many Americans don’t have an emergency fund in place, even as they get closer to retiring. In fact, many of the high net worth families we serve often overlook the benefit of keeping reserves on hand.

However, you may also find yourself on the opposite end of the spectrum: worrying about having too much cash sitting around in a savings account. If this is you, you have a unique advantage. You’re able to start building a financial strategy that helps you to earn more interest on your savings, and potentially boost your retirement income for the next several years.

Need help allocating your savings? Reach out! We’d love to help you build a strategy that’s unique to your financial goals and needs.

Mark and Katherine Fonville

Mark Fonville, CFP®

Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.


Disclosures: Covenant Wealth Advisors is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions.

This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account.

Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

Registration of an investment advisor does not imply a certain level of skill or training.


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