Attractive yields have drawn investors to cash, but with rates declining, they should consider how much they really want stashed in those accounts. While cash-equivalent instruments like money market funds and certificates of deposit once enjoyed yields over 5%, many are now around 4% or less. The annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is 3.73%, as of Tuesday. How much money market funds pay follows the Federal Reserve ‘s monetary policy, which controls short-term rates. On Wednesday, the central bank cut the benchmark overnight federal funds rate by a quarter percentage point to 3.5% to 3.75%. Yet, even with declining yields, assets in money market funds are sitting at a record high. Total assets are now $7.65 trillion, equal to roughly 25% of U.S. gross domestic product, according to the Investment Company Institute . Cash plays an important role in individual financial plans, says Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute. “It provides liquidity for emergencies and short-term expenses, and it may serve as ‘dry powder’ for investment opportunities,” Alvarado said in a note last week. “But while cash feels safe, we believe it is not an appropriate long-term investment for most investors.” Most financial planners recommend keeping 2% to 10% of your portfolio in cash, with the specific amount depending on your goals and life stage, Alvarado noted. “Retirees may hold more for stability while younger investors often keep less in an effort to maximize growth potential,” Alvarado wrote. Calculate emergency needs The general rule of thumb is to have enough liquidity to cover three to six months of living expenses in case of emergency. However, you may want more cash depending on your situation and the current environment. For instance, unemployed Americans in September were out of work for an average of 24 weeks, according to the Bureau of Labor Statistics. “I would maybe be cautious in this type of an environment and give yourself seven months to find that next job,” said certified financial planner Sam Huszczo, founder of SGH Wealth Management in Lathrup Village, Michigan. This money can be held in high-yield savings accounts or money market accounts, with the former insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor and per bank. Money can also be parked in certificates of deposit , although if the money is withdrawn prior to maturity, you’ll face a penalty. In that instance, a CD ladder of staggering maturities can work in order to have some cash available earlier and some later. A sleeve of cash in portfolios Beyond emergency savings, cash can sometimes take a more strategic role in investment portfolios. For instance, noted investor Dan Niles recently called cash his best investment idea . However, goals-based investors should not be trying to time the market by having a large amount of liquidity ready to deploy during market dips, Huszczo said. “Realistically, a self-directed person, historically, just has not been good at buying the dip,” he said. “They don’t deploy that cash in the moment that they should.” Vanguard generally starts with 3% to 5% in cash in a model portfolio, and customizes from there. “It gives you that little bit of extra flexibility to ensure that you can reallocate effectively,” said Perryne Desai, senior fixed income product manager at Vanguard. “You can draw down from the portfolio without having to sell out at, perhaps, fire sale prices.” Another way people can use cash is to shorten the duration of their overall portfolio, she said. Cash holdings can be put in short-term assets like money market funds, Treasury bills or short duration exchange-traded funds. For ready cash, Desai wouldn’t look at durations beyond a year. “What you’re really trying to do is match your assets to your liabilities,” she said. “You tier your cash.” For instance, Vanguard has a 0-3 Month Treasury Bill ETF (VBIL) with a 30-day SEC yield of 3.85% and an average duration of just over a month, and the Vanguard Ultra-Short Bond ETF (VUSB), which has a 4.24% 30-day yield and an average duration of a year. The former has a 0.07% expense ratio, while the latter has a 0.10% expense ratio. Huszczo doesn’t think it makes sense to hold cash in an investment portfolio. Instead, he’s focused on asset allocation based on the investor’s goals, like the classic 60% in stocks and 40% in bonds. Those with excess cash may consider locking in rates on investment-grade corporate bonds while they are still solid, he said. He typically recommends a 10-year ladder, which he said still offers about a 4.46% yield to maturity. “That’s something that will help people try to fight against inflation, or at least do a better job than cash,” Huszczo said.