The Role of Cash In (and Out of) Your Portfolio

Cash is an integral part of every financial plan that can be used as a tool to guide better decisions. Below, we break down how to think about the two places cash shows up in your financial plan: outside the portfolio and inside the portfolio.

Cash Outside the Portfolio

Cash outside the portfolio lives in checking and savings accounts. Even though these accounts are not actively managed, they contribute to the success of your overall plan. Early in the planning process, your advisor will spend time defining how much cash you are comfortable holding and what your ideal balance looks like. There is no right or wrong number. Rather, the importance is in understanding what that number represents emotionally and practically.

For many households, especially couples, this exercise reveals differences in comfort levels, which should be ironed out. A financial plan works best when both people can stay committed to it during stressful periods, so defining a shared cash target helps set boundaries everyone can support. You are in the same car on the same road, so the ride should feel manageable for you both. Alternatively, for investors who are still accumulating assets, excess cash can be revealing. Sometimes it reflects a planned expense, like a home renovation or a new car purchase; other times, it signals hesitation or uncertainty about investing. In both cases, cash is a diagnostic tool that can uncover priorities and inform decision-making.

Establishing a clear cash target creates a baseline you can rely on. If balances consistently fall below or above the agreed-upon level, it signals your plan may need adjustments. In that way, cash can serve as one indicator of whether your financial plan may need adjustments.

Cash Inside the Portfolio 

Inside the portfolio, cash is all about a disciplined investment strategy. It plays a key role in how assets are managed over time, particularly through rebalancing. As markets move, portfolios naturally drift, with some investments outperforming while others lag. Rebalancing means taking chips off the table from areas that have done well and reallocating into areas that are more fairly priced. Cash serves as the bridge in that process, allowing adjustments to happen intentionally instead of reactively.

For younger investors, this matters because periods of market volatility may create opportunities to invest according to a disciplined long-term strategy. Every year has market pullbacks, even in years that end up strongly positive. Having liquidity available inside the portfolio makes it easier to lean into those periods rather than freeze up. Instead of waiting for the perfect moment or worrying about headlines, cash can be deployed gradually through rebalancing or dollar cost averaging.

For retirees and investors living off their portfolios, liquidity serves a different but equally disciplined purpose. Here, it creates separation between market volatility and monthly income needs. Rather than selling investments whenever cash is needed, many portfolios hold six to twelve months of planned withdrawals in cash or cash-like investments such as money market funds or short-term bonds to maintain flexibility. During extended downturns, distributions can come from this reserve rather than forcing the sale of temporarily depressed assets.

Market periods like 2022 are good reminders of why this structure exists. Markets can stay down longer than expected, but having cash inside the portfolio may help some investors continue drawing income without needing to immediately sell other assets during market declines.

What We Can Control

Much of the anxiety around cash comes from things we cannot control. Headlines, interest rate speculation, market predictions, and social media commentary create pressure to act, even when none of it is directly tied to your personal financial plan. A big part of an advisor’s job is helping clients separate noise from what matters to their situation.

What often gets lost in that noise is how frequently markets experience declines. Data going back decades shows that almost every market year includes a meaningful pullback, even in years that ultimately finish positive. Strong years are rarely smooth, but we tend to remember the ending and not the path it took to get there.

Building liquidity into your financial plan is no different than carrying a jacket or an umbrella. You may not need it every day, but when you do, you will be glad it is there. If you have questions about how cash fits into your plan, reach out to Savant today.

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.