I have a confession to make: I hate cash. And beyond that, I do not practice many of the behaviors I have heard preached from financial pulpits over the past several years. For example, I do not keep 3-6 months of living expenses in cash or equivalents.
This paper began on a walk back to my office after lunch one day: I was wondering why I, a PhD Candidate in Personal Financial Planning (at the time), did not practice this advice. My self-diagnosis was that I am very future oriented. I did not want to lose out on the returns my money could be earning if I kept it in equities rather than in a savings account. Sure, I’d be taking a risk of the huge market decline, but with a relatively steady job I didn’t anticipate really needing the cash anytime soon. With so much held in investments, if disaster happened and I lost my job during a market decline, there should be sufficient money there to get by anyway. So, in my mind, I just didn’t see the need to hold much in cash. Then I wondered: do other people do the same thing, and/or for similar reasons? Thus, the idea for this study was born.
Most of my education and experience is in organizational financial management. As such, I approach personal finances from a somewhat different perspective. As I was working on this research paper and trying to interpret what my findings really meant, the idea of working cash came to me. In corporate finance, working cash refers to the stock of cash and equivalents that companies keep on hand to fund their daily operations. Corporate managers do not base cash-holding on the “3-6 month rule”. Why should households be any different?
It seemed to me that, as I had suspected about myself, households may base their cash-holding more on their daily consumption needs. This isn’t to say that households are not saving for emergencies; but rather, like insurance companies, their self-insurance against financial shocks may be held in assets that can earn a return and keep pace with inflation rather than being parked in a savings account losing value by the day.
Continue the Conversation:
- Tell us what you think in the comments below.
- Read the press release: http://afcpe.org/news-and-publications/news-center/rethinking-the-3-to-6-months-rule-of-thumb-in-financial-planning
- Download the research (available to AFCPE members or by request from the authors):
Ammerman, D. A., & MacDonald, M. (2018). Future orientation and household financial asset liquidity. Journal of Financial Counseling and Planning, 29(1)