Having ready access to cash is always a good idea, but deciding exactly how much of your net worth to keep liquid can be tricky. Considering factors such as job security, sources of income and your tolerance for risk can help you determine the right amount to keep on hand.
Understanding Net Worth
Presumably, your overall goal is to make the most of your economic situation and ensure the comfort of you and your family. The first step is to determine your net worth. In simplest terms, net worth is the overall value of your assets -- including your house, cars, bank accounts and any other property you own -- minus your liabilities. These include your mortgage, car payments and any other debts you owe.
Allocation of Assets
Another thing you’ll want to do is go over the record of your assets, including your investment portfolio, if you have one. Ideally, the primary aim is to maximize income while decreasing risk. It's a good idea to speak with a reputable financial planner for specific advice regarding the best allocation of assets for your particular needs and goals. Generally speaking, though, it's wise to diversify your assets in a way that maximizes reward and decreases risk, and allows you to live your life in relative comfort with your physical needs met. In any event, you should keep a portion of your finances in cash so they can be accessed quickly and conveniently should unexpected situations arise.
Definition of Cash
Apart from actual greenbacks in your wallet, cash includes anything that is considered “liquid” or easy to convert for immediate expenses with little or no risk or expenses involved. This includes any money in your checking or savings accounts, as well as money markets or short-term CDs. Though assets kept in cash typically do not earn as much as other investments, their ease and convenience are advantageous for emergency circumstances.
Time is perhaps the primary consideration when determining how much of your assets to keep in a liquid form. Standard wisdom advises keeping enough cash on hand to meet your liabilities, obligations and physical needs for six months to a year and a half. Typically, the more stable and consistent your income, the shorter the amount of time you'll need to cover. In other words, six months of cash on hand may be enough if you have steady, reliable income from employment, but if your income is based solely on investments, you’ll want to aim for a deeper reserve, enough to cover 18 months of expenses.
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