A doctor in his early 40s came to me with about $500,000 in the bank. His expenses were about $9,000 a month, so he was holding around 55 months of spending in cash, or more than four and a half years. He had some investments as well, but the amounts were small and there was no strategy behind them.

He gave me two reasons for keeping so much in the bank. He had no time to think about what to do with it, or even about his life goals. He was also used to seeing that amount in his account, and the thought of not seeing it there was stressful.

What the money was doing

None of this money was intentional. It kept building up because there was never a good week to sit down and look at it.

Meanwhile, his retirement funding and his children’s education still had gaps. He did not have so much money to spare that he could leave this amount in the bank and still reach all his goals.

A large bank balance can give a false sense of security. The number looks comfortable, while inflation consistently erodes its value. You do not feel it until you realise what has happened, and then it is painful. Money that does not grow fast enough cannot carry goals like these.

After some time, he understood the logic. Letting go of the money was still very hard.

The compromise

I normally recommend 3 to 6 months of expenses as an emergency fund, or more if your income is irregular. He wanted $100,000, a nice hard number that came to about 11 months of expenses. That is more than the usual guideline, and it made him feel a lot more secure. A plan has to be one you can stay with.

The other $400,000 went into investments. He did not put it in at one go. He moved it in parts over several months.

This does not mean all his goals are met. It is a material step, and it is better taken now than ten years later, when compounding would have less time to work and he would be even further behind.

What is your cash for?

Cash is the right place for your emergency fund and for anything you will need soon. Money you have set aside on purpose, such as a fund for a career disruption, has a job too.

The money worth looking at is whatever sits above that, and has built up because you never got round to deciding.

Work out how many months of expenses your bank balance covers, then ask what each part of it is for. Keeping more than the guideline can be a perfectly good decision, as long as you have made it knowing what your other goals still need.

If you are a doctor, this is one of several decisions I cover in Financial planning for doctors in Singapore.