Cash makes you bulletproof

Welcome to the fourteenth post of The Invested Counsel—thoughts about financial planning for young lawyers.

I think that cash is probably the most underappreciated part of an investment portfolio. There is a lot to say about stocks and bonds, and there is a lot of money that can be made from stocks and bonds. There is not as much to say about cash, and it’s (probably) not possible for cash to make you a lot of money.

But cash is not there to make you rich. It’s there to make you bulletproof. When bad things happen—the stock market crashes, interest rates hurt bond prices, you lose your job, your house explodes—cash is there for you.

That’s because cash is boring. Unlike stocks and bonds, which can be volatile (i.e., squiggly), cash is not squiggly. It just sits there, pretty much like a lump.

But it is the boring stability of cash that allows you to take other risks. If you don’t have cash to pay for your life in the short term, you can’t invest for your life in the long term.

In turn, cash pays dividends that no other investment can pay—dividends of security and comfort. Those are valuable, and you should collect them just like any other dividend.

What is cash?

Cash is money that you can use immediately, and not worry about it dropping in value suddenly. I think there are basically four types of cash:

(1) Physical Cash. This is self-explanatory. It’s good to have some cash on you at all times, in case you have to pay for something in cash, or a business or restaurant offers a good discount for paying in cash (one restaurant I just went to in New Jersey gave a 5% discount for paying with cash), or in case it’s easier and/or quicker to split a check with cash than with Venmo or Zelle or some other app.

(2) Checking Account. Your checking account should have enough money in it so that you don’t need to worry about being able to cover your bills. Some people like to keep their checking account balances very low, and maximize what they hold in their savings accounts so that they can get a better interest rate on their money, since interest is basically not paid on deposits in a checking account. Don’t bother; the tiny amounts in interest you make based on this effort are not worth the hassle.

(3) Savings Account. Any cash that you don’t need in your checking account should generally be in a high-yield savings account (or “HYSA”). For example, my family’s emergency fund is in a high yield savings account with an online bank. This online bank has no physical locations, but they are a bank just like any other, and they have the same FDIC insurance as any other bank.

(Side note: FDIC insurance is insurance coverage provided by the federal government, which protects depositors from bank failures. If you have money in a checking or savings account at a bank that is insured by the FDIC, and the bank goes under, the federal government will make sure you get all your money back.)

The key phrase is “high-yield,” meaning it pays a good interest rate. As an example, as of September 2026, the interest rate on my family’s HYSA is 3%. A normal savings account at a regular bank could be .4%, which is not good. You generally should not use the savings account offered by your regular bank.

The interest that you make from a savings account can help keep your cash from losing too much from inflation, but remember that interest is taxable as ordinary income. Thus if you are a young lawyer making a good salary and living in New York City, a large portion of that interest income is going to go to taxes.

(4) Money markets. In addition to keeping your cash in a HYSA, you can also keep cash in a money market fund in a taxable brokerage account. A money market fund is a fund that invests in short-term bonds issued by very stable issuers (like the federal government). As an example, as of September 2026, the money market fund that I use in my taxable brokerage account has a one-year yield (i.e., average annual return) of 3.5%. This is higher than the 3% I’m getting in my HYSA, but cash invested in a money market fund is not subject to FDIC insurance, so technically it is a little riskier than the money in the HYSA. Nevertheless, money market investments are in general quite safe and can be considered a reasonable place to keep cash.

How much cash do you need?

The basic financial planning advice is that everyone should have an emergency fund of cash equal to 3-6 months of their non-discretionary expenses. Depending on your circumstances (single versus married, kids or no kids, stable or unstable income, other assets you could easily tap), the right choice in that range will vary.

However, other factors can easily bring you out of that basic range. If you are just starting out, it is very likely that you will have less than 3 months of cash set away. On the other hand, if you are more established, and your income is inconsistent, then having much more than 6 months may be necessary. For example, I heard a financial planner who works with television screenwriters explain that he recommends a 12-month emergency fund, since writers often go long periods of time between shows.

Thus the answer to how much cash you need is based on your whole financial picture, and should not be based on a rule of thumb. I’ll discuss some approaches in next week’s post.

How can I maximize the interest rate my savings will earn?

Shop around. Different banks offer different interest rates for HYSAs, so it may be that a local credit union may offer a better rate than a larger firm. Likewise, there may be different money market funds that you can invest in, and some may offer higher rates than others (though higher rates in money market funds likely come with some small additional risks).

But don’t go crazy shopping around too much. While it makes sense to try to maximize your interest rate, don’t spend too much time chasing the highest interest rate. Depending on the differences in rates and how much you have saved, the additional interest may not be worth it. The more important thing is to maintain a strong emergency fund.

Do you keep cash for buying the dip?

One of the reasons that some people like to keep cash on hand is that it allows them to “buy the dip.” The idea behind “buying the dip” is that when the stock market goes down a lot, if you have cash available, you can buy stocks (including an index ETF like VT) at a discount, and improve your returns.

The problem with this approach is that it assumes that you can identify a good dip to buy into. This is essentially market timing, and no one can do it well consistently. And any money that is sitting in cash waiting for the dip is by definition not invested, and thus not able to appreciate over time. As a result, you probably shouldn’t have a lot of money sitting around in cash waiting to buy the dip.

That being said, buying the dip with a portion of my emergency fund is the one financial sin that I commit from time to time. I know intellectually that it is not rational, since if I’m comfortable investing a portion of my emergency fund in stocks, then that portion should already have been invested. But I think it is a forgivable sin.

That’s all for now. Have a wonderful week.

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