A question we are often asked is ‘how much cash should I hold?’. Enough to let you sleep at night and not too much that your mattress feels too firm?
Okay, I don’t actually recommend you keep cash under your mattress. See next week’s for tips on where to stash your cash. For now though, let me give you a starting point to calculate the right amount of cash you should hold and introduce you to the noodle budget.
THE NOODLE BUDGET
The noodle budget is your minimum monthly expenditure. We tend to recommend always holding minimum 3 months of your noodle budget in cash. If you work on short term contracts, are self-employed or have low job security, you may want to increase this to 6 or even 12 times the monthly noodle budget.
To start, you must calculate what your ‘can’t do without’ expenses are, and we mean really ‘can’t do without’. Then add in your food budget as the cost of maintaining your calories on pot noodles (hence noodle budget).
- Check your bank statement for the past month and add up all your 100% necessary living expenses (mortgage/rent, water, energy, council tax etc.). If you can’t decide whether it’s essential, it probably isn’t.
- Add in food expenses based on the cost of a pot noodle. On average, we find the minimum food cost is £135 for each member of your household per month.
- Add the numbers calculated in (1) and (2) together and you have your monthly noodle budget
- Multiply by 3, 6 or 12 depending on your preference and income security to establish the first part of your minimum cash need
KNOWN EXPENSES ABOVE INCOME IN THE NEXT 2-3 YEARS
If you have known expenses coming up in the next 3 years above your income, you should hold this amount as cash. You cannot afford to take investment risk over short time periods and when an expense is known.
We define a known expense as an unavoidable or very strongly desired expense. For example, you would like a new kitchen (total cost £18,000) within the next 3 years and are saving £500 monthly towards it. If the kitchen will be dangerous, or the cause of relationship breakdown if not updated soon, then your expense is unavoidable. You should save cash for this goal. If the new kitchen is a ‘nice to have’ within the next 3 years but not essential, you may consider directing the savings for this goal to investments and accepting you may have to wait a bit longer to complete the kitchen, spend a bit less or do it in stages if investment performance is less than cash returns.
The amount of cash you hold is entwined with your objectives, risk profile and financial circumstances. This is different for every individual and you should consider taking financial advice to get a more accurate number.
The aim of this blog is to at least provide a starting point for the amount of cash you should hold 3, 6 or 12 times your noodle budget, plus all known expenses over the next 3 years. Simple, not easy.
Gregory Deer prepared this content, a Chartered and CERTIFIED FINANCIAL PLANNERTM for Muvado, a trading style of Sense Network Limited (Brookdale Centre, Manchester Road, Knutsford, WA16 0SR).
None of the information in this communication should be seen as a recommendation and you should seek independent financial advice. Investments carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount invested.