Building a Realistic Minimum Cash Position

How much cash should you have? Questions to consider when building your cash strategy.

Below is an outline of how to starting thinking about a Cash Strategy. A specific way to manage and think about your cash position and how to manage cash specific to your financial plan. We guide all of our clients in this process when we start working together. Reviewing and updating as we help our clients on their financial journey.

When it comes to managing your cash reserves, the common advice of “keep six months of living expenses” is overly simplistic and often leads to unintended consequences—most notably, the accumulation of debt. While this advice may work in very basic situations, it falls short as your financial life becomes more complex.

The reality is that monthly living expenses do not capture the full picture of your obligations, future needs, and potential risks. A minimum cash position should provide stability and flexibility, ensuring you’re prepared for both expected and unexpected financial events without relying on costly debt.

Here’s a better framework to help you determine what’s right for you:

1. Fixed Monthly Expenses

Start by identifying the absolute essentials needed to keep your life running at the most basic level. This is the “keep the lights on” amount:

Housing: Rent, real estate taxes, homeowner’s association fees, insurance
Groceries & Utilities: Food, electricity, gas, water, internet, phone
Transportation: Gas, car insurance, maintenance, or public transit costs
Childcare & Health Expenses: Childcare fees, health insurance premiums, prescriptions
Lifestyle Basics: Gym memberships, subscriptions, etc.

Write down what it costs you to cover these essentials every month.

2. Monthly Liabilities

Next, list all of your recurring monthly debts and obligations:

Mortgage or Rent Payments
Student Loans
Car Loans or Leases
Credit Card Minimum Payments

Even if you’re making progress on paying these down, this exercise is about ensuring you can meet your minimum obligations no matter what.

3. Planned Spending Over the Next 36 Months

Life is full of planned expenses that don’t occur monthly but still need to be funded. This step is often overlooked, but it’s critical for building a realistic cash reserve.

Ask yourself:

Do you have any big purchases planned? Examples include replacing a roof, buying a car, or upgrading appliances.
Are there upcoming vacations or family events? Weddings, holidays, or anniversaries can be significant expenses.
Annual or one-time obligations: Insurance premiums, property taxes, or tuition payments.

If you’ve never listed these out before, it can feel challenging. Just do your best—it doesn’t have to be perfect. The goal is to estimate and identify these planned spending needs.

4. Household Income Structure: Single or Multiple Income Sources?

Your income structure plays a big role in determining your minimum cash needs.

If you’re a single-income household, you may need more cash on hand for added security.
If you’re a dual-income household, the risk is somewhat mitigated, but this isn’t a reason to underfund your cash position.

5. Out-of-Pocket Health Insurance Costs

Health-related expenses can be a significant financial risk. Check your health insurance plan to determine the maximum annual out-of-pocket expense.

Could you cover this cost if a medical emergency occurred?
Adding this amount to your cash reserves creates a safety net for health-related surprises.

6. Job or Career Changes

If you’re planning to change jobs or careers soon, or if your employment situation feels uncertain, this increases the need for cash reserves.

A career shift often includes temporary income disruptions or relocation expenses.
Consider extending your minimum cash position to provide peace of mind during this period.

7. Variable Income Considerations

If part of your income comes from bonuses, commissions, or other variable sources, it’s important to acknowledge that this money isn’t guaranteed.

Build your cash position based on your base salary or most reliable income.
Treat bonuses and commissions as a way to replenish reserves or fund planned expenses, not as a safety net.

Taking a Step Back: Reflect & Review

After walking through the steps above, take a moment to pause and reflect. Start with:

Basic Living Expenses + Liabilities: What’s the annual total?
Planned Spending: Add any significant one-time or recurring expenses for the next three years.

Seeing everything on paper can feel overwhelming at first. That’s normal. Give yourself permission to do your best without striving for perfection. This process is about clarity, not flawless execution.

Review Your Findings With Your Financial Planner

Most people do not want to do this on their own and enjoy a guided conversation or series of at Sterling Edge Financial to figure this out. If you are working on your own share your findings with your financial planner. Together, you can evaluate your true minimum cash position—one that aligns with your lifestyle, obligations, and future goals.

The Benefits of a Realistic Cash Position

By building a thoughtful cash reserve, you can:

Avoid relying on high-interest debt to cover unexpected expenses.
Reduce stress by knowing you’re prepared for planned and unplanned events.
Make financial decisions with confidence, knowing your short-term needs are funded.

This proactive approach can save you hours of stress and thousands of dollars in interest, allowing you to stay on track toward your long-term financial goals.

In Summary:
A true minimum cash position goes beyond general advice. By understanding your fixed expenses, liabilities, planned spending, and risks, you can create a buffer that protects your financial plan and eliminates the need for debt.

Take the time to review your finances thoughtfully—you’ll thank yourself when life throws its curveballs.

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