(Bloomberg Opinion) -- “Could you take $200 out in cash on your way home from work?”
My husband gets texts like this from me often. My natural inclination is to have a modest amount of cash on hand and at home at all times. This ensures I’m always prepared for stores with a minimum credit card spend and cash-only establishments. But those were becoming increasingly rare, especially during the pandemic. I was beginning to think that carrying cash was antiquated. And then Russia invaded Ukraine.
Suddenly, friends were talking about withdrawing cash to store at home. Personal-finance newsletters and social media accounts were advising followers to have cash at the ready. As stock markets reacted to global events and talk of cyber warfare spread, it seemed that even the most dedicated Apple Pay-using, card-swiping, non-cash carriers were stashing some paper currency.
Although it’s valuable to have cash during a crisis and amid uncertainty — it means you aren’t at the mercy of banks being open or the power grid being stable to access funds — the surge of “go get cash” advice gave me pause. Global and domestic events can drastically impact the value of cash, and there is a trade-off in having cash in your home versus at the bank or in investments. Like any financial decision, you have to approach the question of whether and how much cash to have on hand strategically.
During the pandemic, it was common advice to shore up cash reserves. Multiple industries were in flux, and it was hard to predict how stable jobs would be or when we would return to normalcy. But this didn’t mean take cash out of the bank and stash it around your house. It meant pad your savings account.
In times of global unrest, the same advice is prudent. But remember that taking money out of investments and over-indexing toward cash could significantly impact your future wealth. How you think about that ratio is a delicate dance, especially if you have a low risk tolerance. It’s common advice to have at least six months of bare-essentials living expenses saved up, but the pandemic led some to want closer to a full year of savings. Keep in mind that in a crisis, like during the pandemic, your spending will likely drop significantly, which should help inform the cash reserves you need. Don’t hesitate to talk to a certified financial planner if you’re panicking and considering shifting most of your money to cash.
The other part of the cash picture is having physical money in your wallet. Keeping actual dollars at home means you have ready access to funds to pay for basic needs. At the risk of sounding too alarmist, it could be prudent to have cash on hand in case our banking system or power grid gets disrupted. The U.S. Department of Homeland Security has warned about the potential for Russia to deploy retaliatory cyberattacks against the U.S. in response to sanctions.
We also don’t know how financial institutions will react. For example, if people start panicking, banks could reduce cash withdrawal limits and the stock market could temporarily close to prevent a run or a selloff. After Sept. 11, the NYSE and Nasdaq both remained closed until Sept. 17. Having actual cash, or other assets like jewelry, in your home might help some folks sleep more soundly. However, the key is to avoid panicking and loading up on cash.
The amount you’ll need depends significantly on the cost of living in your area, the number of people in your family, other assets you have and the nebulous “peace of mind” factor. Consider other potential risks of having cash on hand, such as robbery. How much money could you afford to lose? Common rules of thumb range from having $400 to $1,000. This may not sound like much, but it would be enough to get staples or necessary items for a short time.
Ultimately, cash is the financial version of a backup generator, a full tank of gas or an emergency prep kit. These are all security blankets, and they should be reassessed at least annually — or perhaps monthly or quarterly during a crisis. Just be wary about focusing too much on cash at the detriment of your future wealth. Rushing to convert the majority of your portfolio into cash and cash equivalents in a moment of panic could have long-term consequences.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Erin Lowry is the author of “Broke Millennial,” “Broke Millennial Takes On Investing” and “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations.”
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