How Much Cash Should You Keep? Automatic Saving - S2E5

How much cash should you actually keep available, and when does saving become something that should happen automatically?

In this episode of The Rhythm of Money, we look at the role cash plays in a healthy financial life, not just as protection against emergencies, but as a source of flexibility, choice, and room to move.

You’ll learn why manually setting money aside can be useful while you’re building a new financial habit, and why there comes a point when automation works better. Instead of reopening the same decision every payday, you can build saving into the structure of your financial life.

We also look at how to decide how much cash to keep based on your income, investments, fixed expenses, and the kinds of financial choices you want available to you.

You’ll learn how to think about:

💰 How much cash to keep available 
🛡️ Why liquidity has value even when you have investments or other assets  
💰 When to move from manually practicing a savings habit to automating it 
🛡️ Why cash reserves can support career, investment, and family choices 
💰 How savings and debt payoff can happen at the same time 
🛡️ How to build a financial system around your priorities instead of reacting month by month

Cash doesn’t have to be money that’s waiting around for something to go wrong. Its job can simply be availability.

And once you know how much availability you want, automation can help make sure that money actually stays.

Chapters

2:00 Manual saving vs. automatic saving
5:09 Why liquidity matters
06:19 Savings vs. debt payoff 
11:07 How to choose your cash reserve 
15:00 Building your financial resilience system

The Rhythm of Money focuses on Somatic Finance, combining practical personal finance with the somatic skills that help you use what you learn within a fully embodied life of thriving.

Living Your True Note

No financial advice is offered or implied. For guidance specific to your situation, consult a licensed financial professional. 

Transcript

SPEAKER_00 0:02

Welcome back to the rhythm of money. Let's say you have money available beyond what you need for this month's required spending. Maybe it's part of your paycheck. Maybe you got a bonus. Maybe you've been letting cash accumulate in checking. And now you have a decision to make. Do you move it into savings or do you use it to pay down debt? That sounds like a fairly straightforward financial question, but it can get surprisingly complicated because there isn't one answer that makes sense for every kind of debt, every kind of savings, or every kind of financial life. And before we even get to that decision, there's another one underneath it. How does money actually get into savings in the first place? Does it happen because you remember to move it every month? Or does the decision get made once and then the system takes over? Those two things can look identical on a spreadsheet. They don't necessarily feel identical when you're living them though. One requires you to make the decision again and again. The other turns the decision into part of the structure of your financial life. And after advising clients as an investment advisor and working as a business consultant before that, I think that distinction matters more than people realize. Now, if you're new here, welcome. Today we're going to look at three things. One, how to move from practicing the habit of saving, which we did previously, to making it automatic. Two, how to think about savings versus debt pay down when both are legitimate uses of your money. And three, how to decide what kind of cash reserve actually gives you the flexibility and resilience that you want. Let's start with the difference between saving manually and saving automatically. Earlier in this season, I've deliberately asked you to make some tiny money moves yourself. There was a reason for that. When you're learning a new financial habit, sometimes the act of doing it matters more than the amount and then the accumulated result. You choose to move money into savings. We watch the balance change. You make the decision again later. And every time you do it, you're collecting evidence about yourself. You're confirming, I'm someone who sets money aside regularly. I can act with a long-term focus. That repeated action changes expectations. It can change self-perception too. You stop being someone who keeps meaning to save more or do it consistently, and you become someone who simply does. That's useful. But eventually there's a point where you don't need to keep practicing the same decision. You don't need to prove every payday that you can consistently move money once you've proven that to yourself. At some point, what was once a new habit is ready to become infrastructure. That's where automation comes in. Maybe a fixed dollar amount lands into an account from every payday. You know, they have the kind of the auto deposit. Or maybe it moves out of checking account every payday. Maybe part of each bonus goes automatically into savings. Maybe you have several destinations already built into your system: retirement, investments, short-term savings, and spending cash. The amount can be different for every person. What matters is that once you've made the decision, you don't have to remake it every time the money arrives. Because every time you reopen a financial decision-making process, you're also reopening all the competing possibilities. Should I pay a little extra on the mortgage? Should I invest this instead? Should I leave more cash available? There is a vacation coming. There's a home project I've been considering. Markets are down. Maybe I should put more money there. All of those may be completely reasonable choices. That's exactly why automation can be so useful. It protects a decision you've already made from getting renegotiated every time another reasonable option appears. It doesn't replace the habit. It's what the habit was preparing you for. First, you practice setting aside some money. Then you create a system that assumes as a normal part of your financial life that some money gets set aside. Some of it stays after it comes in. And there's an embodied piece to this too. When savings is still something you have to decide on manually, there can be a little moment of friction every time. Not necessarily fear, sometimes it's just reluctance. You can see five good places the money could go, and leaving it in cash can feel strangely unproductive. So notice what happens for you in your body around the idea of money simply staying available. A cash balance building to larger and larger numbers with nothing being accomplished by it. Aside from the accumulation itself. What comes up in your body when you think about that? Take one breath. And out. Then a two-second full body scan. You don't need to make anything happen right now. Just notice whether some part of you feels uneasy and immediately wants to assign that money another job. That response is useful information if it comes up. Because sometimes the challenge isn't learning how to save. Now let's get to the larger question. Savings or debt. What should come first? And this is where I want to move away from the kind of financial advice that acts as though every dollar has one objectively correct destination. You may already be contributing to a retirement plan. You may have investments outside of retirement accounts. You may own a home. You may have a mortgage, an auto loan, student debt, business debt, or some combination of those. You may also have more cash building up than you need for everyday spending. The question isn't necessarily whether you have money to work with. It's what job the next dollar should have. That's a more useful question. Because debt isn't one thing, and savings isn't one thing either. If you have very expensive debt, the kind where the interest cost is working against you aggressively, that deserves serious attention. You probably don't want to keep accumulating large amounts of cash indefinitely while paying a very high rate somewhere else. But that still doesn't automatically mean every available dollar should go toward the debt. Because cash has a job too. It gives you flexibility. It gives you options. It means that if something changes, you don't necessarily have to sell investments at a time and price you wouldn't have chosen. You don't have to tap retirement assets, which can come with some serious penalties if you're not 59 and a half yet. You don't have to borrow just because the timing is inconvenient. And you don't have to make a career or business decision simply because you need immediate cash flow. That's very different from thinking of an emergency fund as money you keep around because you're afraid something terrible is about to happen. I think of it more as financial spaciousness. It gives you room to move. So when you're deciding between savings and debt paydown, I'd look at both sides. What is the debt actually costing you? We went into that in much more detail than we're going to do here in episode four last week. So if you need a deeper dive to really answer these questions, that's there. But to be simplistic about it now, you know, good debt versus bad debt. And what would having more cash available make possible? Those are very different questions from just asking, do I have debt? Let's say the debt is relatively low cost. Maybe it's a mortgage you're comfortable carrying. Maybe it's a low-rate car loan. Maybe it's debt with a manageable payment that isn't putting much pressure on the rest of your financial life. I mean, I once had a car loan that was at like 1.9% interest. My savings account was earning 3.5. I mean, why would I? Well, anyway. In that situation, aggressively eliminating it may not automatically be the best use of every available dollar. You may value having more liquidity. You may want to keep investing. You may want greater flexibility before retirement. You may simply decide that paying the debt off early doesn't give you enough benefit to justify giving up other choices. On the other hand, if the debt is expensive, the equation changes. You may decide to keep savings growing but at a slower rate while directing more of your available cash toward the debt. That's one of the things I want you to hear clearly. This doesn't always have to be sequential. You don't necessarily have to finish saving before you start reducing debt, and you don't necessarily have to eliminate all debt before you're allowed to build cash. Sometimes the better answer is simultaneous, but uneven. Maybe both continue, but one gets most of the new money for a while. That gives you a lot more room to respond to the actual financial situation instead of following somebody's rigid order of operations. Ask yourself, what kind of debt is this? What is it costing me? How much liquidity do I already have? How secure are my income sources? What other assets could I access if I needed to? And what financial choices would become more difficult if I had very little cash available? Those questions tell you much more than debt or savings by itself. Which brings us to the other side of this. How much savings is enough? And I want to separate two different kinds of questions here. There's the practical question, how much cash would give you the financial flexibility you want? And then there's the emotional question. How much money would it take before you felt certain that nothing could go wrong? Those are not the same question. The first one can be answered. The second one really can't. No amount of savings can guarantee that life won't surprise you. So I don't think the purpose of cash reserves is to create certainty. I think the purpose is to create options. That's resiliency. And we're going to come back to that idea of resiliency in other contexts in later episodes, but in this context, this is a piece of it here. Options under many circumstances. Now, imagine you decide you want to leave a job, but you'd rather take some time choosing the next one. Cash can give you that time. Maybe a major expense comes up at the same moment the investment markets are down. Cash can keep you from having to sell investments when the timing is bad. Maybe there's an opportunity you'd like to take advantage of. Maybe you want to help an adult child without disturbing your long-term investment plan. Maybe you're self-employed and income arrives unevenly. Or maybe you simply want to know that come what may, several months of your life could continue without requiring you to rearrange anything. That's what the reserve is doing. It's not sitting there uselessly. Its job is option availability. And option availability has value. A common way people start estimating a reserve is by looking at several months of essential expenses. That can be a reasonable starting point, but I don't think you have to treat three months or six months as some universal law. Look at your own financial structure. If you have two stable household incomes, substantial taxable investments, and a relatively low fixed expense set, you may feel comfortable with less cash. Even just one month's living expenses might be perfect for you. If you're self-employed, your income varies considerably, you're approaching retirement, or you simply need to have more flexibility if you're to sleep soundly at night, you might reasonably choose considerably more, perhaps even a year's living expenses. You can also think beyond monthly expenses. What kinds of events would realistically cause you to need cash? How quickly could you replace income? What assets do you have and how accessible are they? How liquid are they? What would you prefer not to touch? Like some people like they have lots of gold, but their idea of gold is that they never sell it, right? So is there something like that for you? That last question matters a lot. Just because you technically could sell an investment doesn't mean you want your emergency plan to depend on doing so. Just because you could borrow against something doesn't mean borrowing is how you want to handle the situation. Your reserve lets you decide in advance which assets you want to leave alone. And the fund doesn't suddenly become useful only when it reaches its final target. One month of essential expenses gives you more flexibility than having all of your available money committed somewhere else. Two months gives you more. Three gives you even more. So I'd think in stages, you don't have to stare at some enormous final number and decide you aren't there yet. You can ask, what would the next meaningful level of liquidity look like for me? Then build toward that. And once you've decided on the amount, automate at least part of the process. Make a percentage of every paycheck due direct deposit into that cash reserve account, or maybe part of each bonus. Maybe you have a target and once you reach it, the automatic money begins flowing somewhere else instead. That's another important point. Automation doesn't mean the system never changes. It means you don't have to make the same routine decision over and over. You can review the system periodically. You can increase the amount, reduce it, pause it when the reserve reaches the level you want, redirect the same transfer toward investments, or use it to accelerate debt paydown. The system should serve your financial priorities. You're not serving the system. And this comes back to where, you know, this isn't really financial advice because you have to be your advisor when you're balancing all of this out. Only you have the information of what your answers are to these questions. And if you're working on debt at the same time, decide how you want new money, divide it. Maybe saving has the larger priority right now. Maybe debt does. Maybe they're fairly balanced for you right now. What matters is that you know why, why you're choosing that. That's very different from letting whatever feels most urgent that month determine where everything goes. The real shift is from reacting to money as it arrives to giving it jobs in advance, jobs that you set for it. And over time, that changes more than the account balances. It changes the experience of managing your financial life. You're not constantly confronting the same decision. You've already made it. You've built it into the structure. And now you can turn your attention to the more interesting questions. Because at some point, those questions do get more complicated. You may be deciding whether to pay off a mortgage before retirement, how much belongs in taxable accounts versus retirement accounts, whether you need different kinds of insurance, whether a financial product somebody's recommending actually makes sense for you or makes sense for you right now. Or whether the choices you're making across different parts of your finances are working together at all? For now, look at the money you already have available and ask one question. What job does this money need to do? Does it need to create more liquidity, for example? Or does it need to reduce an expensive obligation? What job does this money need to do? Is your current balance between the two already doing exactly what you need it to do? Then make that decision deliberately. Wherever you can, build the decision into the system so you don't have to keep making it again. And wherever you're listening to this episode, consider sharing it with one woman who you'd like to see thriving with more options in her financial life. This is the rhythm of money. And you are living your true note in this very moment.