Gyroscopic Investing

It would be foolish for many reasons to hold 100% of your cash allocation as physical paper money. The biggest is having to pay a lawyer to get it back when a government entity decides to seize it as potential drug/terrorist money without due cause and require you to prove in court where you got it. Yes, I am more afraid of my government, than of the cash getting stolen by criminals or being burned by fire.

I do think it's prudent to have cash on hand in paper form for many reasons. Here's a few:

1) 1 to 2 months living expenses in case your electronic assets get frozen/seized for any reason, outside of your control. i.e. someone with a name similar to you did something bad so the government forced the bank to freeze your accounts until you prove it wasn't you. Or just simple identity theft or bank error.

It would be nice to be able to pay my rent in cash for 2 months while the issue gets sorted out. Also nice to be able to buy groceries and get gas to keep going to work.

2) Super amazing deal of a lifetime. Someone needs to get cash fast and sells you something at ridiculously low prices if you have the cash they need right now. It would be foolish to keep money for this sole purpose, because the opportunity cost of lost interest you could have earned on it, probably exceeds the weighted probability of making a huge score. However, if you have 2 months living expenses sitting in cash anyway, and you're relatively sure of your ability to go to the bank the next day and take out more cash, then you can "borrow" the money from your emergency living expense fund to make this once-in-a-lifetime cash purchase.

3) Natural Disaster. I doubt many people during Hurricane Katrina were trading gold coins for food/water. Cash is still king. When cash stops being king, bullets will be king. Gold won't be used for barter until after serious destabilization and fighting/shooting/looting happens.

Additional benefits of having this cash on hand are that it's creditor protected. Creditors can't seize what they don't know you have. If someone decides to jump in front of my moving car for a quick payday, they can't get easily get any assets that are not in banks. Also, if you look poor, then a lawyer is less likely to take their case on contingency. So if you have $100k in the bank in IRAs/401ks, $5k in cash paper money at home, $30k in gold bullion in a safe deposit box, but only $500 in a checking account, then you won't get sued because the only seizable assets the potential litigant can see is the $500 checking account. Thus, holding some paper cash makes you slightly safer from creditors and potential creditors.

Finally, paper cash is "tax-sheltered" because you aren't earning anything on it. You are paying phantom taxes in the form of inflation and reducing buying power, but your adjusted gross income (AGI) doesn't get affected. This can be a huge deal due to the intricacies of the US tax system causing phase-outs of certain deductions based on AGI, and pushing people into alternative minimum tax (AMT) range.

In summary, I feel it's worthwhile to have 2 months of living expenses, on hand, in physical paper currency, with the amount adjusted annually for inflation and your personal living adjustments. I would advice keeping 1 months of expenses in your home and 1 month in a safe deposit box.

The biggest is having to pay a lawyer to get it back when a government entity decides to seize it as potential drug/terrorist money without due cause and require you to prove in court where you got it.

What, you live in Texas?  Highway robbery? Texas police seize black motorists' cash, cars

A couple of months worth sounds like a good plan. In a good, fire-proof safe!

This is interesting:

Additional benefits of having this cash on hand are that it's creditor protected. Creditors can't seize what they don't know you have. If someone decides to jump in front of my moving car for a quick payday, they can't get easily get any assets that are not in banks. Also, if you look poor, then a lawyer is less likely to take their case on contingency. So if you have $100k in the bank in IRAs/401ks, $5k in cash paper money at home, $30k in gold bullion in a safe deposit box, but only $500 in a checking account, then you won't get sued because the only seizable assets the potential litigant can see is the $500 checking account. Thus, holding some paper cash makes you slightly safer from creditors and potential creditors.

That's how it works? So better not to keep a checking (and savings?) account around with too much money in it? Just move it all to your investment account?

Yeah, keeping $1-5k in paper money is probably sensible for the reasons you outlined.

But bear in mind that paper cash burns and can be stolen easily.  So I'd put it in an inconspicuous safe, wouldn't tell many people about it, and would hold an amount that wouldn't ruin me if lost.

We keep a couple of thousand around,  probably should have more, but that's where I draw the line for concern about burglary (though it's not likely as long as our aging shepherd/pit bull mix is still with us).

TripleB, this is a good idea for all the reasons you mentioned.  Part of the emergency fund should be kept secured in your custody as physical currency, a mix of coins and paper of various denominations.  The amount would vary from person to person or family to family, as KevinW pointed out, the amount should not cause any significant financial distress if lost.

Keeping a good supply of other goods--food, water, cleaning and personal care items--in storage at home can mitigate the need to use all of your currency.  You can then save the physical money for things there's no substitute for--like paying rent.