How Much Cash Should You Actually Be Holding?

追加: 2026-06-01

[00:00:00]How much cash should you actually be holding? It's one of those questions that sounds simple, but the right answer changes completely depending on what stage of life you're at. The amount that makes sense when you're 30 and building wealth looks nothing like the amount that makes sense when you're 65 and drawing an income. So, in this video, instead of just giving you a number, I'm going to walk you through a framework you can use to work out the right level of cash for you. We'll look at it from two angles. When you're building wealth in your 20s, 30s, and 40s, and then when you're closer to or actually in retirement. I'll also walk you through the key principles I use with the investors I work with. Let's start with accumulation. The first chunk of cash you want is your emergency fund. The usual rule that gets banded about is 3 to 6 months of living expenses, and that's a sensible starting point. The bit people often get wrong is what living expenses actually means. Think about what your essential outgoings actually are. If you lost your job tomorrow, you'd cut a lot of your discretionary spending. You're not going out for meals as much. You're not going for drinks. The holidays would get rained in. What you still need to cover is the essentials. Your mortgage or rent, food, energy bills, council tax, getting around. That's the number you want to multiply by three to six, not your full monthly spend. The whole point of having an emergency fund is peace of mind. It stops you going into debt when something goes wrong, and it stops you having to sell investments at the wrong time. You don't want to be a forced seller of equity when the markets are down. The cash is there to give you that breathing room. And one quick note on order, you don't need the full 6 months sat in cash before you start investing.

[00:01:31]Realistically, you want at least 1 month of essential expenses in place first, just so you've got a basic buffer. After that, you can take a more balanced approach, building the emergency fund up while also putting money into the market. The point is you don't want to skip the cash buffer entirely and go straight to investing. Once you've got that sorted, the next question is short to medium-term savings. This is where I think a lot of people get it wrong, and I include myself in that when I was younger. I used to have one investment pot. I was pretty disciplined in my early 20s in terms of investing regularly. The problem was I didn't have a clear goal for it. I knew investing was a good thing to do, so I just did it. I would build up to around four or five thousand pounds, but then I'd want to go on a big holiday every year. And because the money was just sitting there, I'd just spend it. I don't regret any of those trips, but it just shows the trap of trying to have one pot to do everything. The thing I encourage everyone I work with is to have multiple pots, each one with a different purpose.

[00:02:27]The emergency fund is one, long-term investing for retirement is another, and then on top of that you might have some shorter-term pots, a holiday fund, a house deposit fund, a new car fund, whatever it is. This might sound like overcomplicating it, but by setting it up this way, it means only in the rarest of cases would you ever need to draw from the long-term investing pot. of thumb I use for which pot lives where is time frame. If you're going to need the money within the next three years, it stays in cash or money markets. It's not really there to grow, it's there for certainty. You want to know that the twenty thousand pounds you put aside for your deposit is still going to be at least twenty thousand pounds when you need it. Once you're looking at three to five years and above, the case for equity starts to make sense, but you still need to be comfortable with the swings. About five years, equity is generally the better home for that money. The longer the time frame, the more equity makes sense with that portion. You essentially want to have the most amount of equity you can whilst not leaving yourself too short and not running the risk of needing to dip into that equity. In terms of holding the cash, we have to talk about the changes coming to the cash ISA in April 2027.

[00:03:29]The cash ISA allowance for under 65 is being reduced from twenty thousand pounds down to twelve thousand pounds.

[00:03:35]And more recently, there's been rumors around how the government will look to close the loophole where you can hold cash and cash-like assets in a stocks and shares ISA. Nothing has been confirmed at the time of recording, but the rumor is that the interest earned on cash will be taxed at 22% which matches the basic rate of tax on interest on cash held outside of an ISA. In the last few days, I've seen a lot of people commenting on this and to be frank, a lot of fear-mongering. I've seen so much clickbait, it's ridiculous. To be clear, this is a proposed tax on the interest earned by holding cash which will be likely done at source by the provider.

[00:04:09]So instead of receiving the full rate of interest, you'll receive a net figure after the provider's already taken the tax off. For example, Trading 212 currently offers 3.8% interest on cash held in a Stocks and Shares ISA. A 22% tax would reduce this to around 3%.

[00:04:24]There's many reasons someone may hold cash in a Stocks and Shares ISA. They could be holding it before investing.

[00:04:29]They could be de-risking prior to a large purchase or dividend payments could be also held there. I've seen a lot of panic from people now thinking they'll have to complete tax returns and how complicated it will be to calculate.

[00:04:42]So I just wanted to clear it up that although this policy hasn't been formally announced, it's likely you won't have to do anything. I should also say the government likes to test the waters with these proposals. It's a supposed leak but they just want to gauge the reaction from the population.

[00:04:57]I also imagine things like money market funds will have the tax taken off their returns in a similar way to how it withholding tax works. I should also say for the record, I don't agree with the overall policy. I don't believe the change to cash ISAs will get more people investing. There's so much more that could be done around education and incentives rather than limiting people's options but that's the government for you. Now let's talk about holding cash in retirement.

[00:05:22]When you're working and building wealth, cash is mostly there for emergencies and short-term goals. When you retire, the risks shift. You're not worried about losing your job anymore because you don't have one. The big risk now is sequencing risk which looks at how the sequencing of returns affects your portfolio when you're drawing from it.

[00:05:42]It's how two people can have the same average return over 20 years and end up in completely different places. If you retire and the market crashes in year two, you're selling investments while they're down to fund your living expenses. That erodes your pot really quickly and you then got a smaller portfolio left to recover when the market eventually bounces back. If the same crash happens in year 15, your pot is bigger. You've already taken years of income out and the fall hurts a lot less. So, that's the problem. The question is, what can we actually do about it? There's a few different ways you could approach this. One of them could be to use an annuity to provide a guaranteed income for life. So, you would hand over a portion of your portfolio to the annuity provider in return for a set amount of income, usually for life.

[00:06:26]You can have inflation protection built in as well as protocols to pass on some of the income to a spouse after death.

[00:06:32]The biggest downside is that once you've handed over the money, there's no going back. You may also die before you receive the equivalent amount back. I think a sensible use case for annuities is using them to cover your essential spending. It means you can then keep a larger proportion of your remaining investments in equity because although it would still be painful experience a market downturn early on, you have the ability to reduce your discretionary spending, unlike your essentials.

[00:06:58]You could also combine an annuity with the state pension to cover your essential spending, leaving your remaining investments purely for discretionary. If you didn't want to use an annuity, one approach would be to use a cash buffer alongside your regular investments. So, you could for example keep around three years worth of living expenses in cash and the remainder mostly in equity. Under normal circumstances where the market is going up, you would sell down your equity using a sensible withdrawal rate of say 4 or 5%. But if the market experienced a downturn, instead of being forced into selling the equity at a bad price, you would switch to spending your cash buffer instead. This is quite an active approach because you have to set those rules in advance and decide when to switch over and then of course back again. Once the market recovers, you can then replenish your cash buffer. But you've got to be specific with your levels though. You don't want to be making decisions after the fact. You've got to set a level at which if the portfolio value drops below, you'll switch over to spending cash and then the same on the reverse. Three years of cash is a happy medium. The more you hold, the worse overall return you're going to get. The return your cash will barely keep up with inflation, whereas the equity over the long term should comfortably beat it. However, if your cash buffer is too small, you run the risk of running out of money and still being a forced seller.

[00:08:17]Three years of cash should give you a long enough window that even in serious crashes, you'll have the time for the market to recover. You could also take it one step further and have a multi-asset portfolio including lower volatile assets such as bonds. These would likely lower your overall returns, but you may need to dip into your cash buffer less often.

[00:08:36]You would approach it in the exact same way, selling the equity in normal circumstances, but if the equity markets took a hit and the bond market started to perform well, then you could start drawing from that portion of the portfolio. Typically, bonds and equities have an inverse relationship, but it's not always the case. 2022 being a prime example. That was a horrible year for this kind of portfolio as central banks around the world drastically increased interest rates to counter inflation spikes causing bond values to plummet. This occurred alongside a sell-off in the equity markets too. So if you do go down the bond route, it could be beneficial to prioritize shorter duration bond or even money market funds which are going to be less susceptible to interest rate changes. The returns may not be as great, but you're protecting your capital. You may also want to utilize lower volatile assets as you make the transition into retirement. Most pension funds do this automatically, although it should be said a lot are ultra conservative. Some providers will start putting you in bond funds as early as age 35. So check the setup you have with your pension, and as you get closer to retiring, you can be more specific with your allocation. And just because you can access your pension at say 57, that doesn't mean that's when you will retire. If you plan to keep working till 65, you'll even more of a time horizon, and tapering down your equity at 50 makes little sense. There's no real argument for being heavily in bonds with more than 10 years to go. If you'd like help thinking through your own situation, whether that's getting your accumulation plan right, or building a structured retirement income strategy, I do one-on-one investment coaching sessions, and there's a link in the description. Otherwise, let me know your thoughts in the comments. I'll catch you in the next one.