How much cash should you carry with you?

Cash is a useful backup for when your other payment methods fail. When your digital wallet isn’t an option, such as during natural disasters or in isolated areas, cash can be a more reliable form of payment.

Cash is also the preferred method of payment for some transactions. For example, real estate buyers might prefer to pay cash for a property rather than take on a mortgage or make a large down payment, to reduce their upfront costs.

Having ample cash also helps you get through unexpected events and expenses, such as auto repairs or medical treatment not covered by insurance. Keeping ready cash at hand can be one way to protect yourself from financial strain if these types of events occur unexpectedly. But how much cash you need — and how you store it — depends on your individual situation.

What is a cash reserve?

A cash reserve is a portion of your cash that you keep readily available for emergencies. You might have several cash reserves, each with a specific purpose.

In general, a cash reserve is kept in a savings account, as savings accounts typically offer higher interest rates than checking accounts. You can withdraw from a cash reserve without penalty, in case of an emergency, but you’ll likely incur a withdrawal fee.

How much cash should you keep on hand?

There’s no hard-and-fast rule for how much cash you should keep on hand, since it depends on your unique situation. That said, financial experts generally recommend keeping enough cash on hand to cover three to six months of living expenses.

If you have an unexpected expense, such as a medical bill or auto repair, you might need to access this cash. It’s also a good idea to keep enough cash on hand to cover taxes due on income from job loss, even if the tax deadline is months away.

If you anticipate a sudden expense, such as a trip to the mechanic or a large medical bill, keep a small amount of cash on hand as a “contingency fund” in case you need to cover the expense quickly.

Which type of cash to keep on hand?

You’ll want to keep different types of cash in your cash reserve. In general, you should keep smaller bills in a regular savings account, while larger bills are kept in a more secure savings account, such as a savings certificate or money market account.

Most banks offer savings accounts with different interest rates. You might consider keeping some cash in an online savings account, which typically offer higher interest rates than other savings accounts.

A money market account also offers higher interest than a regular savings account, but it usually requires a higher minimum balance.

Keep in mind that if you keep cash in a savings or money market account, you won’t be able to easily access it in case of an emergency. That’s why you should keep enough cash in a checking account to cover everyday expenses.

Where to store your cash?

Cash should be kept in a safe place. A safe, a lockbox or a secure deposit box at a bank are all viable options. Be sure to follow any rules for withdrawals and deposits that your bank may have.

Keep your cash stored in different places, such as a safe, lockbox and bank account, to prevent theft. Avoid keeping cash in your house, which is not only less secure but also difficult to access in an emergency.

While cash has its place, it’s not the best way to manage your finances over the long term. Investing in a savings account or other low-risk investment can help you grow your cash over time. Plus, you can write checks using your account for free.

Keeping plenty of cash on hand can help you get through unexpected expenses and events, such as a job loss or medical treatment not covered by insurance. You can also use a cash reserve to cover taxes due on income from job loss.

But you shouldn’t rely on cash as your primary way of managing your money. Instead, you should use a mix of low-cost payment methods, such as bank accounts and credit cards, to make most of your purchases.