How Much Cash Do You Need?

In 2007 I learned a valuable lesson from a dear friend who was running a successful business. Like most businesses, the growth of his company always preceded the revenue and so it was necessary for my friend to use credit as a funding mechanism. Lines of credit also helped him smooth out cash flow as expenses like payroll tend to be predictable while monthly sales were not. He had a little cash on hand but planned on his lines of credit handling most emergency and cash flow needs. It was not a bad business model. In fact, it is a very common practice.
 
When the banking crisis of ’07 hit, my friend was unconcerned because his business was largely unaffected. But he was soon blindsided when his banks, who were having their own serious problems, cut off his lines of credit. It wasn’t his fault. He always made his payments and could continue doing so, but the banks were in a crisis with no money to lend. His business was put into jeopardy. He struggled, but survived, and in the process we both learned a valuable lesson about how much cash to keep on hand for unexpected storms.
 
I have spent much of the past year telling people that my biggest financial concern has been rapidly rising inflation. Inflation can be one of the most regressive forms of taxation, hitting hardest those who can least afford it. I don’t suppose the upper 1% care about the cost of fuel or food but rising prices can be devastating for those living by each paycheck.
 
I have advised that high inflation is a reason to avoid keeping too much money in cash. As I have shared this counsel, I have come to realize that some have taken my advice to the extreme by not holding any cash at all. In fact, one person mentioned to me that they don’t need any cash because they have available lines of credit to handle any emergency. As you can imagine, that comment reminded me of my friend’s experience.
 
So, to clarify my advice, I continue to maintain that holding too much in cash-like accounts is not a good idea during times of high inflation. But cash has its own purpose which is to provide instant liquidity in times of emergency. Even though cash loses value to inflation each day, holding the proper amount for your own peace of mind can be worth the inflationary cost.
 
As a general rule I advise having enough immediate resources to pay your bills for at least 6 months. Take the value of your guaranteed payments such as pensions or social security, and then save enough cash to make up the difference. Never assume your credit lines can be accessed, or that your other assets can be quickly sold to cover an emergency. I just wanted to make that clear as we come into 2022 with all the uncertainty this year is sure to bring.