Setting a cash buffer: How much to keep liquid and where to hold it

Cash earns its place by giving you flexibility. It can protect your lifestyle when plans change, cover known spending without forcing investment sales, and help you stay steady when markets are choppy.

A useful starting point is to separate cash into distinct buckets. When every dollar has a job, it becomes easier to decide what belongs in cash and what is better suited to longer-term investments.

Cash that protects your day-to-day life

Treat your emergency buffer as part of your household risk management, not as part of the investment portfolio.

Many Australians use a rule of thumb of around 3 to 6 months of essential living costs in readily accessible cash. If income is variable, seasonal or dependent on business conditions, a larger buffer can be sensible. Keep any separate short-term goals (for example, a vehicle upgrade or school fees due next year) in their own bucket so an emergency does not derail a planned expense.

Where this cash sits matters. At-call savings is simple, and an offset account can be effective if you have a home loan because it reduces interest charged. The point is access and certainty, not maximising return.

For business owners and self-employed people, it often helps to split buffers three ways: personal emergency cash, a business operating float, and a tax set-aside account. That separation can prevent investing decisions being undone by BAS, income tax, or a quiet trading period.

Cash inside the investment mix

Once the buffers are in place, cash becomes an investment allocation decision. Portfolio cash is usually held for liquidity and stability rather than long-term growth.

It can serve three practical roles:

1. Spending flexibility: Money earmarked for the next one to two years of spending, contributions, or large commitments.
2. Rebalancing support: A place to hold proceeds after trimming an asset class, and funds available to top up other assets when required to restore your target mix.
3. Decision comfort: For some people, a visible cash holding makes it easier to stay invested through normal ups and downs.

Tax and access also influence where you hold cash:

• Outside super, interest is generally taxed as income, but the funds are accessible for opportunities and surprises.
• Inside super, cash and term deposits can be held under super rules, which may suit money that is genuinely for retirement, but access is limited until a condition of release is met.

Consider someone planning to step back from work in the next few years. They may prefer a larger accessible cash buffer outside super to bridge any gap before super benefits can be accessed, while keeping longer-term retirement money invested within super.

Cash equivalents and fixed interest

Some assets are often described as cash equivalents because they are typically less volatile than shares, but they are not the same as cash.

Term deposits and many fixed interest investments can sit between cash and growth assets.

The main differences to understand are:

1. Access: Listed securities generally take a couple of business days to settle after a sale, and some fixed interest investments may be locked in until maturity.
2. Price movement: Fixed interest values can rise and fall as interest rates change, and corporate issuers introduce credit risk.
3. Purpose: Fixed interest is often used to dampen overall portfolio volatility and support near-term income needs.

If the money is needed for a known expense, simplicity and access usually matter more than chasing incremental yield.

How the mix often changes over time

Cash settings tend to change when the cost of getting it wrong increases.

Common shifts include:

1. Early and mid accumulation: When cash flow is strong and timeframes are long, many people hold modest portfolio cash because income covers most near-term needs.
2. Higher responsibilities: As commitments rise (mortgage, business investment, family support), it can be sensible to hold more liquidity so you are not forced into selling growth assets to meet expenses.
3. Approaching and in retirement: Cash and high-quality fixed interest are often used to support a smoother drawdown path, funding planned withdrawals while leaving growth assets time to recover after a downturn.

Superannuation adds another layer. If you are drawing an account-based pension, cash inside the pension account may be used to meet scheduled payments. It is also worth ensuring your beneficiary nominations are current so your retirement cash plan aligns with your broader estate planning intentions.

A practical review checklist

Cash is most effective when it is reviewed deliberately, not reactively. An annual check-in is often enough, and you can also revisit it after major events such as a new loan, a business change, or a planned retirement date.

A simple process is:

1. Confirm your essential monthly spend and reset your emergency buffer.
2. List large expenses expected over the next 12 to 24 months and decide what needs to be held in cash or short-term defensive assets.
3. Check access and ownership, including whether money is inside or outside super.
4. Review your portfolio’s target mix so cash is sized to support your strategy, not simply to fill a spare account.

If you would like to discuss how this could apply to your situation, please reach out to the DP Wealth Advisory team.