Cash. The green stuff. It’s nice, and feels good having it in your pocket.

But how much is too much?

Before you say “I can never have too much cash”, I am referring to keeping cash as an asset.  Or better yet, as an investment. So let me re-phrase the question: what is the percentage of cash that you have in relation to your total net worth?

Unless you’ve got your financial house in tip-top shape, you probably won’t know. But my overall guess is most Americans are sitting on TOO MUCH CASH. The caveat here being “what’s wrong with saving too much money?”

So I want to shed some more light on this topic. I think the best way to think about “cash” is to differentiate “cash” and assign it to one of these three buckets below. And while there may not be a single threshold that works for everyone, I share my observations of what could be rules of thumb:

Short-term needs. This refers to checking and savings accounts at banks and credit unions. This could also be cash that you have around the house (large amounts not advisable due to risk of theft, fire, etc.). This is money used for short-term needs helps pay the day-to-day expenses like mortgage, electric, food, transportation.

People who “save” in these types of accounts sometimes think this is saving for retirement. But I would caution them to look at the relatively low rates of interest (if any!) that these accounts pay, and discuss what alternatives are available. Once you consider inflation, the real returns on these accounts might actually be negative.

But it’s safe. And it’s liquid. And available for the daily household operations.

It may seem obvious but keep enough in your checking to cover the daily/monthly bills. If you know how much income is coming IN to the household, you should also know how much is going OUT. Hopefully more is coming in than going out – or I’ll be referring you to a debt counselor!

So how much should you have in this short-term needs bucket? As much as it costs to maintain your style of living on a monthly basis – times 2.  So, two months’ worth of spending. For example, if you are spending $5k a month…you probably want to keep $10k in the account. Build it up to $10k and over the course of the month you draw it down to $5k. Then build it back up to $10k and the cycle repeats. Without this cushion, you avoid the risk of an overdraft and most likely meet the bank’s minimum balance requirements.

Emergency Fund. This bucket of cash is used to cover life’s unexpected concerns, over and above the regular day-to-day. Unfortunately, everyone will likely face a few financial emergencies in their life. Emergencies can be a loss of a job, an unexpected medical expense, or a child/pet/family emergency.

How much should you have in your emergency fund bucket? It’s recommended that you have 3 to 6 times your monthly expenses saved for emergency.  Using the example above, if your monthly expenses are $5k a month…a family should have anywhere from $15-30k saved on the side. I’d say that six months of savings would leave you “fully stocked” in this department.

Side note – emergency funds should NOT be used for planned purchases like a house, new car, college, and so on. If one has such goals in mind and wants to save for these purposes, I’d recommend making sure the emergency fund is fully intact first. Then create additional savings for these separate goals.

Where to save this money? In general this should be fairly safe and fairly liquid. And while a money market would suffice for this purpose, be warned that you won’t get much return. Same for CDs (make sure they are liquid). I’d recommend keeping these emergency funds at a bank separate from your main banks accounts so you are not tempted to dip into them. Consider an online bank as they tend to pay higher rates on cash balances, or even conservatively invest it in a brokerage account.

Cash in your portfolio. We are now talking about your investments, whether it’s IRAs or 401ks or general brokerage accounts. In general, if you were taking care of your cash buckets listed above you won’t need to keep cash in your investment portfolio. Or at least, you won’t need much.

The amount of cash in the investment accounts will ultimately depend on your personal risk strategy. If you are like most investors and investing for income or long-term growth, you won’t need much kept as cash. Therefore it may not be prudent to keep much cash in these accounts. Most wouldn’t want the low cash returns becoming a drag on the overall portfolio return. Not to mention the I-word (inflation).

How much cash to keep in your investment portfolio? Unless there are some unusual circumstances, no more than 5% of the investment account’s value. Anywhere between 1% and 5% would be advisable. You can still have 5% in cash and have a very conservative portfolio, if that’s what you are targeting.

A logical question would be why keep any cash in your investment portfolio? Several reasons, including having some liquid for dollar cost averaging purposes. Some of that cash can be used to offset any management fees, or it can be used to buy more of your existing investments. You might also see an opportunity present itself, and would like some “dry powder” on the side for that purpose.

Keep in mind that cash might accumulate from investments that do not have dividend reinvested, or from automatic contributions that you are making. I’d keep an eye on the amount of cash and put it to work if it exceeds the 5% threshold level.

In reality, here’s what I see.

People either have way MORE cash – or way LESS – then these rules of thumb that I suggest above. Rarely do I see someone who is disciplined enough with keep an efficient amount of cash in the above buckets. Those who have MORE say it makes them feel more comfortable. While I would consider this to be sub-optimal, it’s also whatever makes you sleep well at night. For those who have way less, I would tell these people they need to be more disciplined and beef up their savings.

All this being said, the cash drag is real! I’d rather see someone being productive with their money, as opposed to hoarding it. But don’t worry people, I have your back.