How to Split Your Money Between Stocks, Bonds and Cash

Every investment portfolio is built from three things: cash for safety, bonds for stability and stocks for growth. How you split your money between them, called your asset allocation, matters more to your results than which individual funds you pick.

There's no single right split. But there is a right order to fill the buckets, and a simple way to decide the rest based on one question: when will you need the money?

What each one does

Stocks have historically grown the most over long periods, and they're also the most likely to fall sharply in any single year. Bonds and cash grow less but let you sleep at night. Your split is a trade-off between growth and a smoother ride.

Step 1: Cash comes first

Before you invest anything, keep an emergency fund of three to six months of essential expenses in cash. That's the money that covers a job loss or a car repair so you never have to sell investments at a bad time.

Keep it in a high-yield savings account, not a brokerage account. Work out your number with the emergency fund calculator.

Money you'll need within about five years, like a house deposit or a wedding, also belongs in cash or very short-term bonds. The stock market can be down for several years in a row, and you can't wait out a downturn on a fixed deadline. See save it or invest it.

Step 2: Split the long-term money by timeline

Everything left over, money you won't touch for five years or more, can be invested. The longer you can leave it, the more of it can go into stocks, because you have time to recover from bad years.

These figures follow the glide path used by Vanguard's target retirement funds, one of the most widely used defaults in 401(k) plans. They're a sensible starting point, not a rule.

Three common model portfolios

Most advisers and fund companies describe allocations in three rough bands. Your emergency fund sits outside all of them, in cash.

The rules of thumb, and where they break

"110 minus your age in stocks." At 30, that's 80% stocks and 20% bonds. It's easy to remember and roughly matches the table above. Where it breaks: it ignores when you actually need the money. A 30-year-old saving for a house in three years shouldn't put 80% of that money in stocks.

"Your age in bonds." At 30, that's 30% bonds. Most experts now consider this too cautious for young investors, because people live longer and need their money to grow for longer.

"60/40." The classic balanced portfolio, 60% stocks and 40% bonds. It suits someone within about 10 years of needing the money, or anyone who wants a smoother ride. More in the 60/40 portfolio explained.

Step 3: Adjust for how you'd really react

The table assumes you won't panic. Be honest with yourself. If your portfolio fell 30% in a few months, as stocks did in early 2020, would you sell?

• If you'd sell: take 10% to 20% off the stock figure. A split you can stick with beats a "better" one you abandon at the bottom.
• If you'd hold, or buy more: the table is fine as it is.

That gut check is called your risk tolerance. See what is risk tolerance?

Allocation by age: examples at 25, 40 and 60

Maya, 25, first job. She has $4,000 saved and $2,500 a month in essential costs.

• Cash: builds a $7,500 emergency fund first (three months), before investing.
• Then: 90% stocks, 10% bonds in her 401(k) and Roth IRA.

Daniel, 40, two kids. Emergency fund done. Retirement is 25 years away, and he wants $30,000 for a home renovation in three years.

• Renovation money: cash or Treasury bills, kept separate.
• Retirement money: about 80% stocks, 20% bonds.

Linda, 60, retiring at 65. Emergency fund done.

• About 55% stocks, 45% bonds, moving toward 50/50 at retirement.
• One to two years of planned spending kept in cash once she retires, so she doesn't sell stocks after a drop.

One person often has several splits at once. That's normal: each goal gets its own timeline.

The one-fund option

If this feels like a lot, a target-date fund does all of it for you. You pick the fund with the year closest to when you'll retire, such as a 2065 fund if you're around 25. It holds stocks and bonds, rebalances automatically, and shifts toward bonds as the year approaches.

Many 401(k) plans use one as the default. For most beginners, it's a perfectly good answer. Check the expense ratio: index-based target-date funds often cost under 0.15% a year, while some actively managed versions charge far more.

If you'd rather build it yourself from three low-cost index funds, see the 3-fund portfolio.

Keeping your split on track

Over time, the parts grow at different speeds. After a strong year for stocks, an 80/20 portfolio might drift to 85/15, which is more risk than you chose. Rebalancing means moving it back, usually once a year. The simplest way is to direct new contributions to whatever is below target.

See how to rebalance your portfolio, or run the 15-minute portfolio audit once a year. If you want to set it up once and leave it, read the set-it-and-forget-it portfolio.

FAQ

What is a good asset allocation for a beginner? First, an emergency fund in cash. Then, for long-term money like retirement, somewhere between 80% and 90% stocks is common for people in their 20s and 30s, with the rest in bonds. A target-date fund handles this automatically.

Should I keep a lot of cash? Only for emergencies and goals within about five years. Beyond that, cash tends to lose value to inflation over time.

Do I need bonds if I'm young? Not many. A small slice, around 10%, softens the drops and gives you something to rebalance from. Some young investors hold none, which is fine if you truly won't sell in a crash.

What is Warren Buffett's 90/10 rule? In his 2013 letter to Berkshire Hathaway shareholders, Buffett said the money he leaves his wife should go 90% into a very low-cost S&P 500 index fund and 10% into short-term government bonds. You'll sometimes see this called a "70/30" rule online, but 90/10 is what he wrote. It's a high-stock split that suits long timelines and investors who won't sell in a crash.

What is the 70/20/10 rule in investing? There's no single official version. It usually means keeping about 70% in core index funds, 20% in narrower funds or individual stocks, and 10% in speculative bets. For beginners, the core is what matters. The same name is also used for a budgeting rule that splits income between spending, saving and debt.

Can you turn $100,000 into $1 million in five years? Not with a diversified portfolio. Growing $100,000 to $1 million in five years takes a return of about 58% a year, every year. The US stock market has averaged roughly 10% a year over the long run. Anything promising 58% involves risk that could just as easily lose most of the money.

How often should I change my allocation? Rebalance about once a year, and shift gradually toward bonds as your goal gets closer. Don't change it because of market news.