If investing is the only way to build wealth for the long-term, then you need to keep as little money in cash as you can. Any unnecessary money held in the bank or building society is money which is not growing for your future.
How much should you keep in cash? Well, your emergency fund for a start. This should be between three and six months of your regular monthly outgoings. Don't include luxuries here, just what you need to survive if, for whatever reason, your income was to stop, or to cover an unexpected bill.
If you are in a secure, employed position, perhaps working in the public sector, then you can probably err towards a three-month emergency fund. If you work for yourself or if you are in any doubt that your job might not be secure, then err towards six months of expenses.
On top of your emergency fund, you should also keep in cash any money that you think you are going to need to spend in the next two or even three years. This is particularly true if the money you need to spend needs to be at least a certain level and cannot be any lower.
If you have a budget for a wedding, say, 18 months from now and you have budgeted at £15,000 for that wedding, the last thing you need would be for that money to only be worth £12,500 because you’ve put it in the market and there’s been a dip right as you need it.
Where to put Your Cash
That's why you should never invest money which you will need in the short-term, because it’s just not worth taking the risk of that money not being there when you need it. So, don't keep any more cash then you absolutely need to – just your emergency fund and any money you’ll need in the next two to three years. But where should you keep the cash that you do have?
Remember that this money is not about making you rich, so the interest rate is less important, I would venture, than security and access. Of course, it makes sense to get the best interest rate you can, but weigh this against the hassle of opening an account with new provider and all the money-laundering hoops you have to jump through to do that.
And question whether it makes sense to shop around for an extra 0.1% interest on what will be a relatively small amount of money. You want your emergency fund to be immediately accessible, so the best place for that is usually a savings account linked to your current account, or at least where you can log-on and move money immediately.
When it comes to money saved for an event in two or three years’ time, you may decide that you can lock that money up in a fixed term deposit account, where you will likely attract a higher rate of interest but with limited access to the money.
A Cash ISA isn't a bad bet, but can cause problems if this is joint money with your partner as you can only have an ISA in a sole name. Chances are, any interest you get paid will fall within your savings allowance anyway, so the tax benefits of a cash ISA are largely moot. Better to keep your ISA allowance available for a stocks and shares ISA, or a lifetime ISA.