How Much Cash should One Keep in the Bank

Often in an investment plan, one fails to allocate enough cash resources in the investment mix. The amount of cash one needs to have in the bank should be based on: both short term needs - such as upcoming travel expenses, medical expenses, holidays, parties, family/religious functions etc. (note that I am writing this in an Indian/Asian context) and long term needs to be considered are - down payment on the house, weddings, buying a car, buying consumer durable (TV, Fridge, furniture, etc.,) and annual religious festivals.

Having sufficient cash reserves is the surest way of preventing expensive borrowings on the credit card. Most people borrow from credit card only because they do not have enough cash reserves. Note that credit card borrowings are the most expensive - with an average interest rate of 21%. The interest rate charged by the credit cards are much higher than the average returns on investing in stocks.

As a rule of thumb, the most prudent financial planning calls for maintaining at least three months of income as cash reserve in the bank.