How much should you have in cash savings?
- Gregory Deer
- 3 days ago
- 2 min read
Enough to let you sleep at night, and not too much that your mattress feels too firm?
Okay, nobody has cash in the house these days, and you shouldn’t have either (see our blog on ways to hold your cash savings here).
The amount of cash savings you should hold is the sum of two parts
A multiple of your ‘noodle budget’; plus
Known expenses within 5 years
That’s the formula for a perfect cash savings pot.
Your 'Noodle Budget'
Your noodle budget is your minimum monthly expenditure. The amount you’d need to survive if you simply ate pot noodles.
We always recommend holding a minimum of 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 your noodle budget.
Here’s how to calculate your noodle budget and the first part of your cash need.
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 (i) and (ii) together and you have your monthly ‘noodle budget’
Multiply by 3, 6 or 12 depending on your preference and income security
Expenses above income within 5 years
Known expenses within in the next 5 years that are higher than income should be held in cash, or have a cash savings plan attached to them.
Never invest money needed within 5 years, unless you’re willing to delay or sacrifice the expenditure. Investments carry risk and you may have less money than planned to meet the committed expense.
For example, you’d like a new kitchen costing £25,000 within the next 5 years.
If your current kitchen is unworkable and potentially dangerous, this sum must have a cash savings plan. However, if you could spend less, or get the kitchen in 7/8 years if needed, you may consider investing that sum.
Summary of cash savings
The amount of cash you hold is dependent on your objectives, risk profile and financial circumstances. This is different for every household and you should consider taking financial advice to find an 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 5 years. Simple, not easy.
Risk warnings
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.