We’re kicking off the 2026/2027 year with a short piece on a topic that often comes up early in the year – how much cash to keep on hand.
This news item is the first in a series of regular educational updates we’ll be sharing throughout the year, each designed to help you stay informed and confident in your financial decision‑making.
How much cash should I hold?
A common question that investors often find themselves grappling with is how much they should hold in cash. Holding a large balance of cash in a savings account or on term deposit can provide a high degree of comfort and security, however, this does come at a cost. This is commonly referred to as “opportunity cost”.
Opportunity cost is the cost associated with choosing one action over another. For example, if you choose to maintain an excessive balance of cash, the opportunity cost is the additional return you may have earned by investing the balance in higher growth assets. This can be significant over a prolonged period of time.
In contrast, it is important for investors to maintain some cash for short-term needs, along with an emergency fund to address the costs associated with events that come from situations that are so unexpected that they would not be considered. A more recent example was COVID-19 and the significant disruption it caused to so many lives.
Naturally, you may wonder how much cash you should set aside for an emergency fund. Like many things in life, there isn’t a single answer. An intuitive approach involves looking at your emergency fund as a multiple of non-discretionary expenses. These are expenses that you must pay no matter what. They include mortgage payments, insurance, rates, food, etc.
Importantly, the emergency fund should be maintained in cash for certainty of value and access. There is little value in an emergency fund that is invested in publicly traded bonds and shares, with fluctuating value and constraints to immediate access. Attempting to withdraw money for an emergency from shares and bonds may take 3-to-4 days to sell and settle, at the earliest. The point of an emergency fund is certainty and accessibility, not maximising your return.
For example, if you are in the 30-to-50-year age group with stable earnings, you may wish to set aside 3-months’ worth of non-discretionary expenses as your emergency fund. Three months has been used on the basis that, all things being held equal, if individuals in this age group were to find themselves unemployed, they can typically find employment within 3-months. The emergency fund should be sufficient to cover unexpected expenses, and the cost of living for 3-months without income.
In collaboration with our independent research provider Māpua Research, we typically recommend that clients maintain a balance of cash in their investment portfolio equal to at least 2% of their total portfolio value. Cash held on the Adminis platform currently earns interest at the Official Cash Rate (OCR) + 0.1% p.a., which is 2.35% p.a.
As we age and move through different stages in life the multiple of non-discretionary expenses for emergency savings typically increases. Often for individuals in their late 50s and 60s, the multiple of non-discretionary expenses for an emergency fund increases to be 6-to-12 months. This reflects the fact that individuals in this age group often have less access to borrow money to fund large one-off expenses and earnings may be in decline as individuals transition to retirement.
An additional point to note, an emergency fund set aside in a savings account, or a combination of a savings account and term deposits, supports the compounding of investment returns. Compounding of returns is most effective when investors are adding to their investments and not drawing out money. Maintaining an emergency fund helps to preserve the value of your other investments and thus, optimising your medium-to-long term return.
While we have provided one perspective for maintaining an emergency fund, there are many different approaches that work. Often, the decision on how much cash to maintain at any one time is personal. Some people prefer to hold more cash than others.
As always, we’re here to help you make thoughtful, well‑informed decisions. If reading this prompts any questions about your own cash position or broader financial plan, please feel free to reach out.
