An Analysis of Cash in Financial Management

 

I recently read an article in the May 2025 issue of the AAII Journal titled “The Role Cash Plays in Individual Investors’ Portfolios.” The article described a study of cash allocations in the portfolios of AAII (American Association of Individual Investors) members. 

The study found that cash allocations of 5% to 10% were most common (27%) but almost 1 in 5 (19%) allocated more than 30% of their portfolios to cash and 16% allocated less than 5%. Definitely, a wide variance in responses!

The study also found that 76% of the respondents placed their portfolio cash into money market funds, followed by brokerage sweep accounts (40%) and certificates of deposit or CDs (34%). Their top three reasons for holding cash were to fund future buying opportunities (53%), as protection against market downturns (51%), and to fund ongoing withdrawals such as retirement income (43%).

Reading this article got me thinking about different ways that cash- both cash assets (e.g., money market funds, CDs, and high-yield savings accounts) and actual physical cash (coins and bills)- are used in financial management. Below are five Barbservations:

Emergency Fund- Standard advice is to accumulate three to six months of essential living expenses in liquid savings. Unfortunately, 1 in 5 Americans have no emergency savings and 37% can’t afford an unexpected expense over $400 according to research by Empower. Nevertheless, it is best to save as much as you can when you can. Life happens and any emergency savings is better than none.

Buffer Account- Respondents to the AAII study, especially retirees living off investment withdrawals, reported having three to five years of living expenses not covered by guaranteed income sources (e.g., pension, Social Security) in a cash buffer account. Not an emergency fund, this money is intended to be used for income withdrawals to avoid tapping stocks during a market downturn.

Cash Discounts- Shoppers and diners can be incentivized to pay for things with cash. For example, gas stations often charge a lower price for cash purchases and some restaurants do the same. It is also not uncommon to see people make deals with contractors to get a discount for paying for home improvements with cash or credit cards are simply not accepted. Example: Viking Cruises offers a 3.3% discount if you pay for a cruise with an e-check (electronic debit to your checking account).

Credit Card Surcharges- It seems like more vendors these days are adding surcharges for purchases made with credit cards. This is another incentive to pay bills with cash. Vendors are trying to avoid the merchant fees they are charged whenever customers pay with a credit. These fees typically range from 1.5% to 3.5% of the transaction amount. I recently had lunch at a restaurant that was adding a 4% surcharge for bills paid with credit cards. I whipped out cash to pay my tab.

Parking Spot- Cash assets are useful when people have money in transition. Think required minimum distribution (RMD) withdrawals, inheritances, settlements, life insurance proceeds, and more. Of course, cash assets should always provide an attractive interest rate. Money can be placed there until long-term decisions are made about what to do with the cash.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Financial Shocks: What You Need to Know

 

Financial shocks are events that result in unexpected expenses and they are especially challenging for individuals and households with limited resources and tight budgets.

Examples of financial shocks are plentiful and include the following:

 

- Big spikes in expenses due to inflation (e.g., childcare, food, insurance, rent, utilities)

- Car accidents

- Disability

- Divorce

- Large home repairs (e.g., roof, furnace)

- Large out-of-pocket medical or dental bills

- Loss of a job

- Property damage due to natural disasters

- Reduced income (e.g., fewer work hours or loss of a side hustle)

- Unexpected funeral or family caregiving expenses

- Unexpected travel expenses for medical treatment, a funeral, or caregiving

- Vet bills for a pet

- Widowhood

 

Financial shocks are typically not an “if,” but a “when” because life happens. Fortunately, there are ways to prepare for unexpected financial shocks and make yourself more financially resilient and better able to handle them. Resiliency resources include the following:

- Adequate insurance (auto, disability, health, homeowners/renters, liability, and life)

- Emergency fund equivalent to at least three months of essential living expenses

- Low debt (high outstanding debt makes every financial shock worse!)

- Marketable job skills (e.g., certifications, degrees, and work experience)

- Strong social capital (e.g., family, friends, church, community and government agencies)

 

Below are some steps to take when you experience different types of financial shocks:

- Apply for available benefits (e.g., unemployment, SNAP, life insurance beneficiary payout)

- Earn additional income, if possible (e.g., second job or “side hustle” freelance work)

- Get professional assistance (e.g., financial counselor or planner, lawyer, government agency)

- Redo your spending plan (budget) to reflect changes in income and/or expenses.

- Seek information from reputable unbiased sources (e.g., Cooperative Extension and public libraries)

 

Need more information? I was happy to contribute to content of this recent NerdWallet article about ways to recover from an financial shock.