At some point, saving regularly leads to a different kind of financial question. You may have built up a meaningful amount of money in your bank accounts, started investing and reached a position where you no longer need every euro you earn to cover your current lifestyle. Then a simple question begins to appear: how much money should I keep available, and how much should I invest?
There are plenty of rules that try to answer it. Keep three to six months of expenses in cash. Keep a certain percentage of your wealth in liquid assets. Invest everything you are unlikely to need in the short term. These can be useful starting points, but they also create the impression that there is a correct answer that can be calculated independently of the person asking the question.
There isn’t.
The amount of money you should keep available depends not only on what you spend today, but also on what your financial life might look like tomorrow. Your income may be stable or unpredictable. You may be planning to buy a home, start a business, change career, reduce your working hours or help your children financially. You may have significant assets but little income, or relatively modest wealth combined with a very stable income. All of these circumstances can change the amount of liquidity that makes sense.
This is why the question is slightly incomplete. Rather than asking how much cash you should have, it may be more useful to ask what you need that cash for.
Some money has an obvious purpose. It may be there to cover unexpected expenses or provide a buffer if your income temporarily falls. Other money may be intended for a decision you expect to make in the next few years. If you are planning to buy a home, for example, the money you expect to use for the purchase should probably be considered differently from capital you do not expect to need for fifteen or twenty years.
That distinction matters because liquidity is not only about emergencies. Liquidity gives you options.
Having enough money readily available may allow you to make a decision without being forced to sell an investment at an inconvenient time. It may give you the flexibility to take a career break, finance a business opportunity or make a large purchase without fundamentally changing your investment strategy. In that sense, some of the money sitting in a bank account may be doing something valuable, even if it is not generating a particularly high financial return.
But the opposite is also true.
Keeping too much money available for too long has a cost. If a significant part of your wealth remains in cash for many years without a clear purpose, you may be giving up the opportunity for that capital to grow. The cost is not always visible because nothing has been lost from your bank account. It is instead the return that the capital could potentially have generated elsewhere.
This creates an important balance. Holding too little liquidity can restrict your ability to make decisions when circumstances change, while holding too much can reduce the long-term growth of your wealth. The objective is therefore not to maximise either liquidity or investment returns independently. It is to understand how much liquidity is actually valuable to you and how much capital can reasonably be put to work for the long term.
Consider two people with exactly the same €100,000 in their bank accounts. One is planning to buy a home next year and expects to use most of that money towards the purchase. The other has no significant financial commitments, has a stable income and expects not to need the money for at least ten years.
It would be difficult to argue that they should make the same decision simply because they both have €100,000.
The money may have the same nominal value, but it has a completely different role in each person’s financial plan. For one, it represents capital that may soon be required. For the other, it may represent long-term wealth that has not yet been allocated to its most productive use.
This is also why the usual three-to-six-month emergency fund rule can be useful without necessarily being sufficient. Someone with a highly predictable salary and few financial commitments may not need the same liquidity buffer as someone whose income depends on a small business. Likewise, someone who expects to make a major financial decision in the next two years may rationally hold more cash than someone with no foreseeable need for the money.
The relevant variables are not independent either. A change in one part of your financial situation can affect the others. Buying a home may reduce your liquidity while increasing your debt. Starting a business may make your income less predictable while increasing the amount of capital you need to keep available. Approaching retirement may reduce the importance of employment income and increase the importance of your portfolio.
This is where financial planning becomes more useful than a fixed rule.
Instead of deciding that you should always keep 10%, 20% or six months of expenses in cash, you can look at your financial position over time and consider what happens under different circumstances. What happens if your income falls? What happens if you buy a home? What happens if an important expense arrives earlier than expected? What happens if markets fall at the same time that you need to use part of your portfolio?
These questions may not lead to a single optimal number. They help you understand how much flexibility your financial position actually provides.
Financial security is often associated with having more money. But having more wealth does not automatically mean having more financial freedom. A large portfolio that cannot easily be accessed when you need it may provide less flexibility than a smaller portfolio combined with an appropriate amount of liquid assets. At the same time, keeping a very large amount of wealth permanently in cash may provide a feeling of security while quietly limiting the ability of that wealth to grow.
The right balance is therefore not simply about choosing between cash and investments. It is about giving each part of your wealth a purpose. Some capital may need to provide immediate security. Some may need to remain available for decisions that are approaching. And some may have a long enough horizon to be invested with the objective of growing your wealth over time.
There is no universal percentage that can determine that balance for everyone.
The right amount of money to keep available is the amount that gives you enough security and flexibility to make the decisions you may want to make, while allowing the rest of your capital to work towards your longer-term financial goals.
Because ultimately, the question is not simply how much money should I keep in cash?
It is how much liquidity do I need to keep the options I want to have?
