Why is cash so important?

The simplest answer is that cash keeps your plan alive when real life does not cooperate. Markets correct, employers restructure, children arrive early, parents need care, boilers fail, visas change, and opportunities appear with short deadlines. Cash is the bridge that carries you over each of those gaps without forcing a sale at a bad time or a loan at a bad rate. When clients ask whether they should keep as little cash as possible because “idle money loses to inflation,” I remind them that cash does work, just in a different way. It buys time, certainty, and choice. Those are not soft benefits. They are the conditions for every good financial decision you will make.

There is a second answer that sits behind the first. Cash reduces the behavioral tax you pay when stress is high. A portfolio can be elegantly diversified across geographies and asset classes, yet if you need rent money next week and your equities are down this week, the elegant design will not help. Cash gives you the psychological buffer that allows you to stay invested in the long-term plan while meeting the short-term need. It protects your future returns from your present panic. That is why the right amount of cash is not a static number from a textbook. It is a number that reflects your household’s volatility, your job stability, your currency mix, and your responsibilities.

Think about liquidity the way you would think about oxygen. You do not notice it until it is missing. When liquidity is thin, you start making decisions you would never choose under normal conditions. You accelerate a property sale and give away price. You incur fees for urgent transfers. You accept a personal loan with terms that favor the lender’s timing, not yours. Cash is the unglamorous solution that prevents this cascade. It smooths cash flow between pay cycles. It absorbs timing mismatches between expected bonuses and fixed bills. It lets you pay the deductible on an insurance claim without touching your investments. The annual return on those avoided mistakes is difficult to quantify in a spreadsheet, but it is real.

For households in Singapore, Hong Kong, and the UK, the case for liquidity has a regional flavor. In Singapore, a high share of retirement and housing wealth sits inside CPF and property. These are valuable assets with specific rules and horizons, yet they do not pay school fees or flight tickets on short notice. In Hong Kong, high rent and variable bonuses create uneven cash flow for many professionals, which makes a disciplined buffer more important. In the UK, higher household energy costs and fixed mortgage terms can raise the penalty for timing errors. Across all three contexts, expats face a separate planning risk. Currency movements and cross-border transfers introduce friction you cannot fully control. A sensible cash position in your spending currency keeps those frictions from dictating your choices.

The most common objection to holding cash is inflation drag. It is a fair concern, and it should influence how you hold cash, not whether you hold it at all. In periods when overnight rates are low, a cash reserve can feel like dead weight. Yet when policy rates rise, as we have seen in recent years, high-yield savings, money market funds, and very short-dated government instruments can pay a meaningful yield while preserving liquidity. The purpose of your reserve does not change. The vehicle should. What you want is cash that is accessible, low risk, and aligned with your time horizon. If you can earn an attractive rate without sacrificing those criteria, accept the yield. If rates settle lower again, accept that the true return of cash is the optionality it gives you precisely when markets are not rewarding risk.

Optionality is the quiet advantage of cash that most planning conversations underplay. It is not only protection against bad surprises. It is access to good ones. If a dream role in another city requires a deposit, flights, and two months of overlapping rent, the person with liquidity can say yes. If a family member needs support that will be repaid later, the person with liquidity can act quickly and decide about repayment on a humane timeline. If markets correct and you have a pre-agreed plan to add to long-term positions, the person with liquidity has the freedom to follow the plan rather than watch it from the sidelines. Optionality is not a speculation strategy. It is a way to prevent your life plan from waiting on the market’s mood.

So how much is enough? Here is a simple framework that respects the reality of busy professional households without turning cash into a belief system. Think in three layers that sit on top of one another like a calm, functional stack, then adjust the stack as your life and income profile change.

The first layer is operating cash. This is the money that moves through your month. It covers fixed bills, groceries, transport, childcare, and the small irregularities that show up even when life is peaceful. A practical rule is to keep one month of expenses in a primary current or checking account, plus any large known bills due within the next thirty days. For dual-income households with steady pay cycles, one month is usually enough. For single-income households or variable income roles, give yourself a little more breathing room in this layer.

The second layer is your cushion. This is the true emergency reserve that takes the shock when work becomes uncertain or when a large expense arrives without notice. For stable salaried roles with portable skills and supportive networks, three to six months of essential expenses is often adequate. For contractors, commission-heavy roles, early stage founders, or expats with visa or relocation risk, six to nine months provides healthier coverage. Notice that the frame is essential expenses, not total lifestyle spend. In a genuine emergency, households naturally shift to a simpler pattern for a period. Size the cushion to that lean pattern so that you can hold the line without panic.

The third layer is strategic cash. This is money set aside for near-term goals that you do not want hostage to market swings. It might be a wedding in a year, a postgraduate program in two years, or a down payment within three years. The horizon determines the vehicle. If the date is firm and inside a year, keep it in a high-yield savings account or an ultra-short instrument that you can redeem without price risk. If the horizon is two to three years and you are comfortable with small fluctuations, consider a short-duration bond fund with conservative credit, always aware that price can move. The point is to match liquidity to the date, not to chase a slightly higher yield that could cost you the goal.

Where should you place these layers in practice? Keep operating cash where your day-to-day banking already lives to avoid transfer errors. Place the cushion in a separate high-yield account or a conservative money market fund so that it is accessible within a day or two but psychologically “over the fence” from everyday spend. Name the account with its purpose to set a rule you will respect. For strategic cash, choose tools aligned to your market. In Singapore, many families use a mix of high-yield savings, fixed deposits with short tenors, or short-dated government instruments when yields are acceptable. In Hong Kong and the UK, money market funds, premium savings accounts, and short gilts or T-bills can play the same role. If you are an expat who earns in one currency and spends in another, hold the relevant layers in the spending currency wherever possible. If you must hold in a different currency temporarily, be deliberate about conversion windows to avoid unfavorable rates.

A frequent planning question is whether to keep the cushion and strategic cash with the same institution or to diversify across providers. The answer is practical, not ideological. If your balances exceed deposit insurance limits, spread them. If you worry that keeping everything under one login will tempt you to spend, separate them. If you travel often or work across borders, keep a portion in an institution that makes transfers simple and low cost. There is no prize for the most complicated structure. There is only the calm that comes from knowing you can reach what you need quickly and without penalty.

Another common question is whether to invest a part of the cushion in order to “work harder.” Treat this idea gently. The cushion is not meant to be clever. If you blend it with risk assets and a drawdown arrives at the same moment as a job transition, you will have traded certainty for the hope of a slightly higher average return. That is rarely worth it. If you want a modest amount of defensive duration or a little extra yield in the strategic layer, that is a different conversation, and even then the risk should be small and the time frame clear.

Cash also interacts with insurance in ways that are easy to overlook. A healthy reserve allows you to select higher deductibles on some policies, which can reduce premiums while keeping your risk controlled. It allows you to bridge the delay between a claim and a payout without stress. It helps you absorb the costs that policies do not cover, such as travel to support family, temporary accommodation, or uncovered portions of medical care. The reserve does not replace insurance. It helps you use insurance as it was designed, as a guardrail rather than a replacement for planning.

What about property, which many families in our region treat as the anchor asset? Property can be stable and inflation sensitive over long horizons, yet it remains illiquid and transaction heavy. Cash is what lets you hold property through rate cycles and rental vacancies. Cash is what lets you avoid forced sales that erase years of patient compounding. Property and cash are not rivals. They are partners with different jobs.

It is also useful to talk about the rhythm of cash. A plan that only sets a number for the cushion and then ignores it for years will drift. Build a simple cadence into your year. At bonus time, refill the cushion to its target if you dipped into it. When you receive a pay increase, decide what portion raises your automatic savings and what portion refreshes operating cash to keep everyday life smooth. When your mortgage resets or childcare costs change, revisit the layers. These are short check-ins, not overhauls. The aim is to keep the stack proportionate to your current life rather than the life you had two years ago.

For households with investments on automatic schedules, cash can be the source of discipline rather than a competitor to it. When markets are volatile, the presence of a healthy reserve allows you to continue those contributions calmly. When markets rally and you feel enthusiastic, the reserve keeps you from overcommitting at the top. In both directions, cash moderates your behavior. It becomes the adult in the room that lets the rest of the plan work.

Parents sometimes ask whether cash teaches the wrong lesson to children who watch them plan. I would suggest the opposite. When children see that their family keeps a small, named reserve for surprises and goals, they learn that money is a tool for steadiness, not just for buying things. They observe that big purchases are planned, not impulsive. They notice that stress is lower when surprises arrive. Those are healthy lessons that last longer than any single investment fact.

If you are early in your career or rebuilding after a change, the numbers I have described may feel out of reach. That is normal. Start with a first month in your operating layer, then build the cushion slowly. Transfer a small fixed amount on payday and forget it. When it hits three months, pause and check how that feels. If your role is stable and your network is strong, you might hold there. If your industry is cyclical or your family is growing, keep going. There is no virtue contest here. There is only what lets you sleep and what keeps your plan intact.

For expats who move between Singapore, Hong Kong, and the UK, cash planning gains one more dimension. Maintain a small reserve in each relevant currency for immediate needs, even if most of your assets live in one base currency. Coordinate transfers ahead of known expenses. Keep a record of account details and deposit limits in each jurisdiction. The administrative order will save you money and time when life speeds up.

Finally, remember that “Why is cash so important?” is not a question about performance. It is a question about fit. Cash fits the messy, unpredictable parts of life that do not respect market calendars. It supports the human side of finance where confidence and calm matter as much as basis points. It lets you say yes to an opportunity and no to a panic sale. It carries your household from one month to the next without drama, and it holds the space for every long-term compounding decision to do its quiet work.

If you are not sure where to begin this week, ask yourself four gentle questions. How many months of essential expenses would let me breathe if work paused? What big dates in the next three years would I like to protect from market timing? In which currency do I spend most of my life, and am I holding enough cash in that currency to avoid expensive conversions at the wrong moment? Which account names and locations would make me less likely to raid the cushion on a tired Friday night? Your answers will tell you where to move first.

You do not need to be aggressive. You need to be aligned. Cash gives you that alignment by linking today’s realities to tomorrow’s intentions with the least possible friction. Treat it as the operating system of your plan. Fund it on purpose. Review it lightly. Let it do its quiet work so that everything else you own can do its best work over time.