How Much Cash Should I Keep In My Pocket?

Cash. When things get tough, cash is king. If the total stock market falls 30%, cash holds its value. When bonds fall 10%, cash holds its value. Call it a security blanket. But it can be an expensive blanket.

The expense comes in the form of inflation. The problem is, as the cost of goods and services rise, cash stays flat. It loses its purchasing power over time. A $10,000 “stack of high society” tucked away in my pocket way back in 1998 is still worth $10,000 in 2020. But it also can’t buy as much.

For example, a 16 oz craft beer is quickly approaching $8 at pubs in my community. Luckily, I have blue-collar tastes. So I usually avoid fancy beers or only buy them during happy hour. But even if I go cheap, a Pabst Blue Ribbon will still run me $4.50. It seems like just yesterday I was paying $1.00 for a draft PBR. If you think beer is bad, you should see how much my health insurance deductible has increased over the years. The long and the short of it is there’s a cost that comes with holding cash because things become more expensive.

Milwaukee, Wisconsin in 2016: former home of Pabst Blue Ribbon

So how much cash should we keep in our portfolio?

Deciding How Much Cash to Have in a Portfolio

So, we need to come up with a way to help us decide how much cash to keep in our portfolio. Most simple investment portfolios are made up of stocks (equities), bonds, and cash. Some people like to try and get fancy and throw REITs into the mix, but that really isn’t necessary.  

For people like me, cash can help provide some security when the world around us is collapsing. Everyone has different ideas about how much cash someone should have in their pocket. These are just a handful of them:

  • Cash should only be used to cover an emergency fund.
  • Cash should be no less than a 3-month emergency fund.
  • Cash should be no less than a 6-month emergency fund.
  • Cash should be a percentage of our total net worth.
  • Cash should be a fixed amount based on our expenses.
  • Cash allocation should be a moving target depending on what the market is doing.
  • Cash should be $0.00; 100% equities is definitely the way to go.
  • Cash should be $0.00; keep it in short term bonds to get a higher return on investment.  
  • Cash should be $0.00; use your credit card as an emergency fund. 
  • Cash allocation should be determined by what the Shiller price-to-earnings ratio is doing.
  • Cash is out, Bitcoin is in.

I have used several different methods over the years to try to determine how much cash I should have. Early on, the goal was to save one month of expenses. Then three. Once I hit that, I was able to start taking advantage of investing in the stock market. But as my net worth grew, strategies needed to change. An unexpected bear market forced me formally define that strategy.

Max’s Approach

I have enough self-awareness to know I am not going to freak out in a bear market. In other words, I know better than to sell my total stock market index fund when things get tough. But I also think having a solid cash allocation helps me deal with any anxiety that comes up during tough times.

Now, when I talk about my “cash in my pocket”, I am talking about liquid cash that is not held in a retirement account. In other words, my cash allocation refers to cash I can get access to instantly should I ever need it. I do have some little pockets of cash spread out in various accounts throughout my portfolio, but I can’t easily get to it. For example, my Health Savings Account (HSA) provider requires me to keep $1,000 in cash so I have it in case I need it for medical bills. I don’t consider that liquid cash since I need to jump through a hoop or two to get access to it.

Max is far from an academic. Keeping things simple is important. So, although I am sure some of the ideas above are great ones, I tend to stick with things I can easily understand. So how much cash does Max keep on hand? Here’s a hint. We only have to look as far as Max Out of Pocket crew’s 2019 annual spending.

The Max Out of Pocket crew’s 2019 spending

A Fully Funded Year

In 2020, Max is keeping a full year emergency fund in cash. That comes to $51,436 and it sits in a Vanguard money market fund (VMMXX) in my brokerage account. It is a pretty nice security blanket. I know that if Mrs. Max OOP and myself both got laid off tomorrow, unemployment aside, I would have over a year before I needed to consider selling investments in a down market. That’s a nice little runway for me to figure things out. I would also definitely make lifestyle changes to reduce expenses to make the money last even longer. In 2019, that would have meant cutting the Ecuador trip, not buying a new computer, and rolling back on the skiing. Those cuts, along with a few other changes, would extend the runway even longer.

Exactly $51,436

Getting to this number took some serious work. Unrelentless saving and planning in my 20s led me to have this level of security in my 30s. A nice reserve to help me sleep at night. It is also just a fraction of my overall portfolio, a fraction that will hopefully continue to shrink over the years.

But Max, This Isn’t Cash…?

Keeping $50,000 stuffed under the mattress isn’t ideal. There are things outside of my control like wind, water, fire, and thieves that could accidentally ruin my cash allocation. My pocket isn’t much better. So, I hold it in a Vanguard money market fund in my brokerage account.

Some people may argue the technicalities, but I consider this a “cash-equivalency”. I can save that argument for another day, but I would much rather hold cash-equivalents than real cash. It also gives me some light protection from inflation because I get interest payments paid out every month on the balance. The interest income is taxed, but I’ll take it.

Leaving Money On The Table?

Statistically, I would get a much better return on this $50,000 if it was invested in the stock market. But I am willing to forgo those returns in the name of security and liquidity. It’s a luxury I am willing to pay for.

That said, as levelheaded as I like to think I am, it has been very difficult for me not to invest my last $50,000 into the stock market during this pandemic. I needed to formally define how much cash I wanted to hold on to. So I held tight, requiring myself to leave a year of cash untouched in my brokerage account. Now, it’s officially documented as part of our strategy.

Are there situations where I might want to invest this $50,000 into an extreme bear market or a house? Maybe. Can I ‘borrow’ from my cash allocation to help me fund day to day living during a short term front-loading exercise? Probably. Can I fund small projects around the house from it and pay it back? Perhaps. But I need to document those situations/criteria before they happen. I plan to do just that.

Additionally, maintaining a cash allocation like this is much easier when you have W2 income coming in to pay the regular bills. I am still working fulltime and Mrs. Max OOP is working part-time teaching, a field diversified from my own. I am grateful to have a pretty solid current of cash flow hitting our accounts each month. If we didn’t have this W2 cash flow, I would probably require a bigger security blanket to help me sleep better at night.


Your cash allocation is personal. There are a lot of variables that go into it. I have chosen to keep a cash allocation that will last us at least a year. I have to say, it is a nice feeling. But will my strategy change? Maybe, but not anytime soon.

I generally don’t think it is a good idea to regularly change personal finance strategy. There is an opportunity cost that comes with overthinking this stuff. But that doesn’t mean we can’t make some light changes to plans over the years. At the moment I don’t plan on changing anything. But I can’t say I don’t have other things in development to help me better manage some of the negatives that come along with holding cash.

Am I leaving money on the table by not having this invested? Definitely. But it’s a price I am willing to pay for my security blanket. The nice thing is, now that we have this built up, I can invest every dollar that comes in (after expenses) without really thinking about it.

How big is your security blanket?

*I do keep a limited amount of cash in our Fidelity checking account. Finance people like me might call this an “operating account”. It is where our paychecks land and bills are paid from. It is generally less than a few thousand dollars and it is “swept” every two weeks into investments, retirement accounts, or other “buckets” as needed. I will touch more on this later.


3 Responses

  1. David says:

    Thanks for the post. I too don’t hold 0% cash. Right now, we have enough cash on hand for about 6 months of expenses. And in my brokerage+retirement accounts, I’m currently about 9% cash, but that’s an immediate anomaly and I it to drop back down to about 2% in a few days when some transactions finish clearing. I keep our emergency cash alongside our regular checking, which hasn’t been a problem because our budgeting pretends like it’s not even there. And having it alongside makes me worry less about overdrafting it. Luxury living, I suppose.

    • Max OOP says:

      Thanks, David.

      Since writing this, I moved this allocation over to a short term bond fund (VFSUX). The last drop in interest rates really made the money market hard to stomach. Not doing much better with the bond fund, but at least there is a larger monthly interest/dividend payment. I have been considering an ultra-short-term bond, but I really need to leave things alone and focus on things more material.

      Hoping to get closer to 0% cash in the near future, currently at 6% due to a similar anomaly you are experiencing.

      In some ways, this is just symbolic and does fit into a larger target allocation.

      Do you have a traditional checking account? I just use fidelity cash management these days. We closed my wife’s brick and mortar account down in North Carolina when we moved up here.


      • David says:

        We kicked the traditional checking account to the curb. I’m using the Fidelity CMA/Brokerage option, detailed in the link on my comment. Pretty happy with the experience.

        Yeah, money market interest rates are basically zero. I just need to move more out of cash and not worry about the interest rate on cash.

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