How Much Cash Should You Hold?

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“How much cash do you have at home?” I once asked a friend who is an extremely smart investor and businessman.

(The question wasn’t too personal… He’s a good friend and we talk about money. I had dinner with him at his home earlier this month in California.)

“I keep six figures at home,” he replied.“Wow!” I said. “That sounds a bit extreme.”

“Is it?” he asked. “How much are you earning in interest in the bank?”

I saw where he was going with this… You earn basically zero interest on your money in the bank, and zero outside of the bank.

So there’s not much harm in holding cash outside of the bank.

You’re simply diversifying where it’s held.

He also reminded me that it’s surprisingly hard to get large amounts of cash out of your bank. He was right again…

Have you tried taking a large amount of money out of the bank recently?

I took $5,000 in cash out of the bank a couple weeks ago – and the bank struggled to find it. The tellers actually told me, “Sir, if you need to take this kind of cash out of the bank in the future, it’d be better if you’d give us a few days’ notice.”

Really? My local bank branch struggles to come up with $5,000 in cash?

Yes – and that’s not the first time that has happened to me at this bank branch. (It’s a branch of one of the largest banks in America.)

What if I wasn’t the only person that day who wanted a large amount of cash? How much of YOUR money do you really think the bank would give you on that day?

I’ve never considered holding a large amount of cash (except for a brief moment during the crisis in 2008). However, my friend makes some good points:

  1. You earn zero interest in the bank and zero outside of the bank… So why not hold some cash outside of the bank?
  2. If the banks run out of cash (or shut down for a few days), then you’ll have no cash. You are essentially broke at that point.

This happened recently in Greece… One day the banks were open, the next day they were closed. And they stayed closed for three weeks.

While an extreme crisis like that is unlikely in the U.S. today, it is possible in the future. Meanwhile, there’s little downside in holding extra cash outside of the bank today.

The bottom line here is you ought to hold way more cash than you think… Think of the number you believe is right… and then consider ADDING A ZERO TO IT!

Good investing,

Steve

Source: Daily Wealth

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