Money Talks: How much cash on hand is too much?

Two things come to mind when it comes to managing your cash.

One is your liquidity levels.

Liquidity is how fast you can convert your assets into cash money.

Let me illustrate that with the car you drive. You would have to dispose of it to get cash from it i.e. to liquidate it. That means putting it up for sale, advertising it online then meeting prospective buyers (and also jokers). The legal transfer of documents also takes up time.

This process could take you anywhere from a week to a couple of years. The duration of this process is how liquid your car is.

Let’s compare this to the investment you have in a money market fund, for example. All you need to do to liquidate this money is email the insurance company requesting for a withdrawal and the cash hits your account in three days, at most.

With the savings in your bank account, for example, there are no middle men. All you need to do is whip out your phone to access the banking app and your cash hits your M-pesa within minutes. Ka ching ching.

Using this illustration then, your bank’s savings account is more liquid than your money market fund.

Cash is king

And your money fund is more liquid than your car.

Second, your cash levels.

Second thing that comes to mind when managing your money is your cash levels. That is, the cash money you have on hand.

Here in Kenya, there is no longer a great need to have cash on hand because we have M-pesa/mobile money services: you can easily access your bank accounts through your mobile phone, and transfer money from your bank into your mobile wallet.

You can also make payments directly from M-pesa.

Nonetheless, there still exists a desire amongst us to have ready cash on hand. Because, you just never know with this life. How your trajectory can shift in the snap of a finger.

Cash is indeed king.

Being prepared for whatever emergency will arise is applauded, the flipside is though, that you may have so much emergency-ready cash that it becomes excessive and you lose out on other opportunities to grow your money.

How much cash on hand is too much cash? Well, this differs from person to person. There is that sweet spot to having just enough cash to finance an emergency but not too much that you lose out on investment income.

Consider these scenarios to answer this elusive question. Consider that you may have too much cash on hand if:

1.You have set money aside for an expense line in your budget that is never actualised. Say, Sh20,000 to launch your vegetables supply business. Or for your solo trip to Diani. Or for that online course. You know what I’m talking about.

If the event actualising the expense doesn’t come to pass, and it keeps appearing and reappearing in your budget month after month, then consider this Sh20,000 excess cash on hand.

2. Your income has increased by a certain percentage but your expenditure, savings or investments have not grown in proportion. This means that this money from the increment is not going anyway but stagnating in your bank account.

Put that extra money to work by spending it, saving it or investing it.

3. You don't feel a pinch when setting money aside for your savings. They say that you will know you have put sufficient money in your savings when you feel a pinch. This pinch is your internal accountability partner telling you that you have put aside as much as you can spare.

Gradually increase your savings – while reducing your cash on hand – until you feel this pinch.

4. You had stashed a loose stack of billsin your house then forgot about them. You had stashed them away for an emergency. This money is hidden away somewhere so secure, so out of reach that even you sometimes can't trace it. And I’m not talking about a slit in your mattress or in the pocket of an old blazer that sits at the back of your wardrobe. No, further away than these obvious spots.

If you keep stashing cash bills and forgetting about them, then you have excess cash on hand, my friend.

5. You keep investing in business ventures that go nowhere. They are like an aeroplane that taxis on the runway but never gets airborne. These business ventures are a result of prematurely launched business ideas from you or from others. Either way, you don't conduct proper due diligence and you get burned again and again.

Instead of putting money into these premature ideas, consider investing the cash in less risky investments such as a money market fund or government bonds.

6. Your debtors are settling old debtsbut you are not putting that money to any good use. The assumption when you lend someone money is that they are in need and you have the money to extend to that need. When they settle their debt – on time or later – consider that money excess cash.

Instead of letting it sit in your expense account, ask your debtor to wire that money directly to your savings or investments account.

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