As the financial system adjusts to the end of the near-zero interest regime, you may wonder what it means for your cash stash.

More precisely, should you ramp up or slash your cash allocation now that interest rates hit two-decade highs?

The answer isn’t so simple. From time horizon to risk tolerance to market expectations, there are numerous factors you have to explore.

In this article, you’ll learn what to consider when determining how much cash to hold. And make sure you read to the end to know what experts recommend in 2023.

Cash is more than just… cash

In finance, when referring to a “cash position,” this typically means cash and cash equivalents. Cash equivalents are very liquid short-term investments. They provide a modest return but with a low risk of a significant change in value.

Common examples include:

  • Treasury bills (T-Bills)
  • Commercial paper
  • Money market funds
  • Certificates of deposit (CDs)
  • Short-term government bonds

For example, a financial advisor might recommend you keep 7% of your assets in cash and cash equivalents. Of this 7%, perhaps a third is sitting in actual cash, a third is invested in money market funds, and a third is invested in short-term Treasury bills.

While the exact definition can vary, cash equivalents are meant to be stable securities you can quickly sell should you require funding.

Why keep any cash at all?

If cash is expected to underperform most other assets over the long term, why bother keeping any?

Ultimately, it comes down to risk.

Cold hard cash is static. Unlike most other assets, its price doesn’t go up and down each day. While it’s true inflation can reduce its usable value, cash doesn’t operate like other conventional assets.

Similarly, while their prices fluctuate, cash equivalents tend to possess very low volatility. Although they may not generate breathtaking returns, they typically won’t produce massive and rapid losses, either.

  • Liquidity: Cash gives you immediate access to funds when needed. For example, you have predictable funding if an unexpected medical emergency occurs.
  • Flexibility: If a tempting investment presents itself, you possess the necessary dry powder needed to exploit the opportunity.
  • Attractive returns in a high-interest rate environment: With rates at 5.5%, even modest savings accounts deliver impressive yields. As a result, cash can be a more attractive asset when interest rates are high.
  • Strategic rebalancing: Cash can allow you to efficiently rebalance portfolios without selling existing investments. For example, if you’re equity weight is lower than its target, you can buy more of the asset instead of selling your bond position to cover funding.
  • Diversification: Cash and cash equivalents, like stocks and bonds, are an asset class. By maintaining exposure to this asset class, your portfolio gains diversification benefits. For example, cash can help hedge downturns in equity markets, protecting your portfolio from a more severe loss.
  • Peace of mind: Some people value safety. Cash and cash equivalents are among the safest assets with the lowest volatility.

What do financial professionals recommend?

  • U.S. Bancorp recommends cash and cash equivalents represent between 2% and 10% of your portfolio.
  • Some investment professionals, like Eric Edstrom, director of cash management at RBC Wealth Management-U.S., say you should maintain six months' worth of operating cash.
  • Edstrom’s colleague, Fred Rose, head of Credit & Liquidity Solutions at RBC Wealth Management-U.S., says, “Three to six months of cash is what you always want to have on hand,” though in some cases, “you could go up to twelve months if you feel like you have more risk in your life.”

When interest rates are high, financing is expensive. Having cash on hand is helpful if you need to make a large purchase, like a new car. It allows you to avoid borrowing at steep interest rates.

On the other hand, when interest rates are low, liquidity can be obtained via lower-cost financing. In that environment, lower cash holdings make sense.

How much cash should you hold in 2023?

As discussed above, financial experts typically recommend 2% to 10% cash weights in your portfolio, but the exact number depends on various factors.

Time horizon

All else equal, the sooner you require cash, the higher your cash allocation should be.

For example, a higher cash position might be wise if you plan to purchase a car in the next three months. This is particularly true with interest rates at 5.5%. Any financing you’d need will be costly in today’s environment.

Risk tolerance

Usually, the more risk averse you are, the higher the cash level you should maintain.

Imagine you want to build a swimming pool in the summer of 2024. By then, you predict interest rates will be substantially lower than today.

Because you expect borrowing to be much cheaper, you decide you’ll finance most of the purchase. Not only that, you expect the stock market to surge in the coming months and want to remain heavily invested.

Of course, there’s a risk you’re wrong. Perhaps interest rates remain elevated, and the stock market falls. When it comes time to begin installing the pool, you’re left financing at a high interest rate or selling a portion of your stocks at a loss.

Are you willing to take that chance?


Keeping a higher cash position makes sense if you have a large upcoming purchase, like a Mediterranean cruise.

On the other hand, if you have no forthcoming large purchases and your goal is simply to earn a high rate of return, a lower cash weighting would be understandable.

Financial needs

A heavier cash allocation is prudent if your day-to-day living expenses are high. For example, perhaps you’re helping your children pay for school and related costs over the next few years. During this period, you might decide to keep a higher cash position.

Of course, once they graduate, you can reduce the cash weight.

Flexibility is important

The amount of cash you need in your portfolio will change over time. Evolving preferences and needs coupled with changing market environments demand revisiting your cash levels periodically.

So it’s helpful to maintain a flexible approach to cash management. If you’re feeling uncertain about economic prospects for the future, holding a bit more cash might make sense. Even if it just provides you peace of mind.

According to Edstrom, “A general rule about ‘how much cash do I need’ does not exist,” Instead, he says, “Our lives are fluid, and circumstances often dictate the ebb and flow of our cash needs.”

As always, if you’re uncertain, consider speaking with a financial advisor. They can help determine a suitable cash level based on your needs, goals, risk tolerance, and market expectations.