One of the older phrases of the finance world is "cash is king".
These days that doesn't have to refer to the physical cash of notes and coins with how accessible online banking is, perhaps electronic cash is king. In-fact, carrying around hundreds of dollars in your wallet may not be a good idea.
So how much cash should you have in the bank account? Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) love it when we put cash in the bank because it means they can lend it out at better rates than they pay us in interest.
It doesn't seem useful to have cash in the bank these days. You'll be lucky if your savings account's interest rate is 2% or higher right now. So, I think the best (and perhaps only) reason to keep cash in the bank is if you're saving for something or for emergencies.
So how much should be kept for emergencies? Below I'll share my thoughts on a decent emergency fund.
Every adult including teens
The current financial environment makes it very hard to save any money after paying for all the bills and other expenses. It's quite alarming to read how many Australians or Americans could be tipped into bankruptcy by a single one-off cost.
I believe it's essential to have at least $1,000 ready to go for an emergency. Whatever it takes to get to $1,000, selling stuff or working overtime, even if it just means not spending on discretionary items for a while. I think everyone should have at least $1,000 as a foundation and to give financial confidence.
Single adult with a job
Assuming you have a job and your own place (including renting), there's a few things that can go wrong. A broken fridge could cause a lot of stress, but a written off car could be a really bad outcome for someone like a tradie.
That's why I think most people should have enough cash to replace their car with a decent alternative. You need to decide how much you'd need to spend for a replacement – $5,000, $10,000, $15,000 or whatever is necessary for that second hand car option.
Family
Having a stable financial position is very important, so having $1,000 probably isn't going to help most families feel financially safe.
Every family has a different budget as they are signed up for different liabilities – perhaps a monthly car repayment or the monthly mortgage amount. So a good way to think about it could be in terms of total monthly expenses.
The typical financial guideline is that a family should have three months of living expenses saved, perhaps up to six months of living expenses. This could be a range from $7,500 up to $30,000 or more.
Foolish takeaway
At the moment my family has around three to four months of monthly expenses saved up, I'd like to get that up to six months eventually, although it's building at the minimum required addition of $200 a month into a high interest savings account.
