How To Allocate Your Cash Effectively

Though often overlooked, cash management is an essential part of your financial plan.

To manage cash effectively, not only do you need to know how much cash to set aside to achieve your financial goals, but also where to put it. Here we’ll discuss what is the right amount of cash to keep in hand and where excess cash should be put.

How much should be in your current account?

Your current account should only hold up to 2 months of your monthly expenses. As current accounts earn a negligible interest rate, putting anything more or all your savings it in will actually lose you money due to inflation.

So how do you calculate 2 months worth of expenses? First, assess how much you’ll need for your bills (rent, utilities, and phone bills), and purchases you foresee (daily meals or a holiday). Secondly, add a little buffer of approximately half a month. This buffer should only be used in the event your computer breaks down and needs fixing or other unforeseen accidents.

Do keep in mind that the larger the buffer, the more likely you’ll be tempted to overspend. So, the exact size of your buffer comes down to how disciplined you can be, versus how risk-averse you are. The rest of the money should be put in an interest-accruing accounts or investments. 

Where should you place your emergency fund?

Before diving into where, the general rule of thumb for how much to have in an emergency fund is 6 months’ worth of expenses, plus a comfortable buffer. 

You want the emergency fund to sit at a place where it can generate enough interest to offset inflations rates, and yet still remain liquid enough for you to able to gain access to it easily. Based on this, a savings account, money market fund, or a low-risk liquid investment, would make good places to park your emergency fund. 

If you've chosen to put it in a saving account, it is wise to evaluate interest rates. We say this because banks advertise attractive interest rates, but usually only a portion of your balance is eligible for the advertised rate, and only for a specific period of time.

Take for instance, if your emergency fund of $50,000 is in a savings account, it’s likely that the entire $50,000 isn't earning the advertised rate. Instead, your funds are subjected to a tiered interest rate. Money in a tiered interest savings account, will earn you small interest increments with each dollar you have, up to a certain balance threshold. Say if a bank offers you a 2.1% interest, you most likely aren’t earning 2.1% on the full $50,000 SGD— but perhaps 2.1% on the first $15,000 SGD of it, followed by a lower interest rate on the rest.

What about fixed deposits? Well, fixed deposits aren’t really good options to park an emergency fund because there is a penalty for terminating the account before it reaches maturity (usually a couple of years). 

Large upcoming expenditures? Plan ahead

Got money saved up for a large upcoming expense like a wedding or home renovation? Don't keep it under your pillow, make it work harder for you and park it in a short-term investment instead.

Since this lump sum would not be spent, why not place the money in a short-term investment (0 to 3 years) and in low-risk products so that it earns you a good return. When shopping around for short-term investments, keep in mind that liquidity and low volatility should be your two most important considerations before committing to the investment.

Invest the rest

Keeping cash in hand may be safe, but you are missing out on earning potential returns that could help you reach your financial objectives sooner. In short, let your money grow by taking advantage of compounding interests and investments.

Read these next:
5 Steps to Reaching Your Financial Goals
Best Fixed Deposits in Singapore
Best Personal Loans in Singapore with the Lowest Interest Rates
Ethical Investing: Can You Make Money From It?
Robo Advisors Singapore

By StashAway
StashAway is an online investment management company headquartered in Singapore. The company was founded in 2016 and was the first robo-advisor to obtain a full capital-markets services license from the Monetary Authority of Singapore.