How much money should I keep in cash?
Cash flow
A common starting point is 3-6 months of essential expenses for stable W-2 income and 6-12 months for variable income or business owners, adjusted for obligations, dependents, and risk tolerance.
Defining 'essential expenses'
Use your true fixed and necessary monthly outflows, not your average lifestyle spending. Mortgage, insurance, utilities, food, childcare, and minimum debt payments, the base you would still owe in a tight month.
Variable income changes the math
Business owners, equity-heavy compensation, commissioned roles, and 1099 income usually warrant larger reserves. Cash absorbs the variability so investments can stay invested.
When more isn't better
Cash above the planned reserve loses purchasing power to inflation. The undecided cash bucket is usually where anxiety lives, not the named reserve.
What people often get wrong
- Confusing 'safe' with 'productive'
- Holding multi-year reserves without a defined purpose
- Keeping reserves in low-yield accounts when high-yield options exist
What to think about next
- Define your essential expense base in writing.
- Choose a target reserve in months and dollars and label that account clearly.
- Move excess cash into a structured plan, investments, debt paydown, or specific near-term goals.
When to consider working with a CFP®
Working with a CFP® can help when these decisions feel intertwined, taxes, investments, cash flow, and life goals tend to move together, and a planning relationship can offer structure, prioritization, and accountability over time.
Frequently Asked Questions
Where should I hold the reserve?
Most high-yield savings accounts and money market funds are reasonable options. The goal is liquidity and stability, not yield maximization.
Should the reserve sit in my brokerage?
Some people use short-duration treasuries inside a brokerage. The execution risk and tax considerations differ from a savings account, but it can work for organized investors.
Talk to a CFP® who works with high earners.
Connect with a CFP® to help you navigate this decision and build a comprehensive financial strategy.
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