How Much Cash Should Be In Your Financial Plan?
Discover the role of cash in your financial plan with expert insights from David Shotwell and Bob Powell on FinStream TV. Plan wisely for your financial goals.
Key Takeaways
- Build a contingency fund of 3–6 months' expenses in cash vehicles like high-yield savings accounts or money market accounts, adjusting based on income stability
- Use certificates of deposit (CDs) to lock in current rates for known expenses with specific timelines, such as a roof replacement planned for summer 2026
- Implement CD laddering by staggering maturities (e.g., $50,000 in 6-month CDs and $50,000 in 12-month CDs) to maintain regular liquidity while earning rates
- Use Bankrate.com to compare rates across online banks, which typically offer higher yields than traditional banks or credit unions
- Limit cash allocations in your overall portfolio to the portion needed for your contingency fund and short-term needs (e.g., 5% in a 60/35/5 stocks/bonds/cash portfolio), and invest the rest long-term in stocks and bonds to protect against inflation
How Much Cash Should Be In Your Financial Plan? What role should cash play in your financial plan? In this insightful conversation, David Shotwell, a financial planner with Shotwell Rutter Baer in Michigan, joins FinStream TV Co-Founder Bob Powell to explore cash in financial planning and how it fits into a sound financial strategy.
Many people focus on the fact that interest rates on money markets and CDs have risen significantly. Since 2022, it’s been common to see rates of 5% or better on these types of cash vehicles. But rather than just chasing returns, Shotwell encourages investors to ask a more strategic question: What is this money for?
Cash should be held with purpose. Shotwell breaks down two key roles:
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Contingency fund: Cash provides stability in uncertain times. An emergency fund can cover unexpected medical bills, job loss, or large home repairs.
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Short-term spending needs: Cash is ideal for money you plan to use within the next 24 to 36 months, depending on your risk tolerance.
While short-term yields may be attractive, cash is unlikely to outperform inflation over the long haul. That's why it’s best reserved for short-term goals, not long-term wealth building.
Key takeaway: Don’t treat cash like an investment—treat it like a tool. Allocate it thoughtfully to meet specific needs and reduce the risk of having to sell long-term investments during market downturns.
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