Investors who build their portfolios with exchange-traded funds (ETFs) often share a common goal: long-term growth with a diversified, low-maintenance approach. But even the most dedicated buy-and-hold investor has to manage day-to-day financial realities — bills, unexpected costs, and the possibility of income disruptions. That’s where a cash buffer comes in.

Holding cash alongside an ETF portfolio can smooth out life’s financial bumps without forcing you to sell investments at the wrong time. The question is: how much is enough? Hold too little, and you risk dipping into your ETFs in a downturn. Hold too much, and you might miss out on the returns those funds could earn in the market.

There’s no universal formula for the “right” amount. Instead, the decision depends on your income stability, expenses, investment strategy, and comfort level with risk. In this article, we’ll unpack the role of a cash buffer, explore the trade-offs, and outline practical ways to find a number that works for you.

What is a cash buffer?

A cash buffer is money kept in a liquid, easily accessible account — such as a high-interest savings account or a mortgage offset account — to cover short-term spending needs or unexpected events.

It’s not the same as an emergency fund , although the two concepts overlap. An emergency fund is typically larger and set aside for major life disruptions like job loss, medical expenses, or a major home repair. A cash buffer, in the context of investing, is often smaller and exists specifically to:

• Cover upcoming or irregular expenses without selling investments.
• Provide a liquidity cushion if market conditions make selling ETFs undesirable.
• Offer peace of mind so you can stick to your investment plan during volatile periods.

Think of an emergency fund as your financial safety net , and a cash buffer as your shock absorber for everyday investing life.

Why hold a cash buffer alongside ETFs?

There are several practical and psychological reasons investors choose to keep some cash alongside their ETF holdings.

1. Avoid selling in a downturn

Markets can be unpredictable. If your ETFs have fallen in value and you need funds for living expenses or a big purchase, you might be forced to sell at a loss. A cash buffer can give you breathing room to wait for markets to recover before touching your investments.

2. Smooth out irregular income or expenses

If you’re self-employed, work seasonally, or receive performance-based pay, your income might not arrive in neat monthly instalments. Likewise, large but infrequent expenses — such as insurance premiums, car registration, or holiday travel — can be easier to manage with a cash buffer in place.

3. Reduce stress and decision fatigue

For many long-term investors, knowing they have a ready supply of cash for near-term needs reduces anxiety. This psychological benefit shouldn’t be underestimated; it can help you stay invested during market swings rather than reacting impulsively.

Factors that influence your cash buffer size

Determining the right buffer is personal. Several key factors can guide your decision.

Income stability

• Salaried employees with stable jobs might get by with a smaller buffer since their paycheques are predictable.
• Self-employed, freelance, or commission-based workers often need a larger buffer to weather income fluctuations.
• If your income depends on business performance or seasonal cycles, your cash buffer becomes an important part of your risk management.

Portfolio volatility

A portfolio heavily weighted towards equities — especially growth or thematic ETFs — will generally be more volatile. This increases the chance you’ll need to sell during a downturn if you have no cash buffer. Portfolios with more defensive holdings (e.g., bond ETFs , dividend ETFs) may not require as large a cushion.

Upcoming expenses

If you know you have significant outlays coming — such as a home renovation, new car, or tuition payments — it’s worth holding extra cash in the short term. This prevents you from liquidating ETFs to cover these costs, particularly if the timing coincides with market weakness.

Risk tolerance

Some investors are comfortable with minimal cash on hand, trusting they can access credit or sell assets if needed. Others prefer the security of seeing months’ worth of expenses in their account. Neither approach is inherently “better”; it’s about what lets you sleep at night while staying invested.

Life stage

• Accumulators (still building their portfolios) may prioritise keeping most of their money invested, maintaining only a modest buffer.
• Retirees or those drawing income from their investments often hold a larger buffer to manage sequence-of-returns risk — the risk that withdrawing funds in a down market erodes capital faster.

How much is ‘typical’?

Research into personal finance habits shows a wide range of cash holdings. For example:

• The Australian Bureau of Statistics reports that, on average, households hold around 10–15% of their assets in cash or deposits — though this includes all savings, not just buffers.
• Some retirement planning frameworks suggest retirees keep 1–3 years’ worth of spending needs in cash or cash equivalents to cover living expenses without selling investments in a downturn.
• Among accumulators, personal finance surveys often find people keeping between 3–6 months of living expenses in combined emergency funds and cash buffers.

These aren’t prescriptions, but they illustrate how context — especially income sources and spending patterns — affects the “typical” number.

The trade-offs of holding cash

Holding cash has benefits, but also opportunity costs.

Opportunity cost

When markets are strong, cash generally earns far less than a diversified ETF portfolio. Even with high-interest savings accounts paying 4–5% in recent years, equities have historically averaged higher long-term returns. Holding too much cash means potentially missing out on compounding gains.

Inflation risk

Inflation erodes the purchasing power of cash over time. A buffer that sits untouched for years may lose value in real terms, especially if interest rates are low.

Peace of mind vs. returns

The trade-off isn’t purely financial. Many investors are happy to accept a lower return in exchange for the confidence that they won’t need to sell ETFs in a downturn. This psychological safety can help maintain discipline — and avoiding panic selling can protect long-term returns.

How to decide on your number

Finding your cash buffer “sweet spot” involves assessing your needs and comfort level, rather than following a rigid formula.

1. Start with your baseline expenses

Calculate your average monthly outgoings — including housing, food, utilities, insurance, transport, and discretionary spending. Decide how many months you want your buffer to cover based on your income stability and upcoming expenses.

2. Factor in portfolio risk

If your ETFs are heavily equity-focused, you may want to err on the side of a slightly larger buffer. This gives you flexibility during market downturns.

3. Consider your safety nets

Do you have an emergency fund, offset account, redraw facility, or supportive family? These resources can potentially reduce the need for a large buffer.

4. Stress-test your plan

Imagine scenarios such as:

• Losing your income for three months.
• Facing an urgent $10,000 expense during a market slump.
• Interest rates dropping significantly.

Would your current buffer allow you to avoid selling ETFs in these cases?

5. Adjust over time

Your buffer doesn’t need to be static. You can increase it before a known period of higher expenses or reduce it when conditions feel stable. Review annually to ensure it still aligns with your circumstances.

Final thoughts

A cash buffer is a flexible tool that can help ETF investors navigate both market volatility and life’s everyday unpredictability. While it’s related to an emergency fund, its role is more about smoothing short-term needs and providing the confidence to stick to a long-term investment plan.

The “right” amount varies by income stability, spending patterns, portfolio risk, and personal comfort level. Some may find that a few months’ expenses is plenty; others, especially in retirement or with irregular income, may hold more.

Ultimately, your cash buffer is there to serve you — not to match a benchmark. By assessing your needs and being willing to adjust as life changes, you can find a balance that keeps you invested and sleeping soundly.