How much cash do I need on hand? This is the hardest question you will have to answer. Statistically when you are very young (eg. early 20's), and if you have a consistent job that you enjoy, the "correct" answer is almost none. You could live paycheck to paycheck, investing everything that is left over each week. Any large expenses that need to be paid straight away (eg. car servicing, unplanned trips) you could put on a credit card with a long interest free period and then save for the next few weeks and pay it off. If you don't save enough you simply sell enough shares to pay whatever is left over. Same goes for any large expenses that a month of savings can't pay off - just sell your shares.
I couldn't live like that.
For a robot that would work really well, however for me that would require too much looking at money which I don't want to do. For an older (Maria edit: this should just say "very old") person with, kids(s) a house and mortgage it makes sense to have a reasonable amount in an offset account. Have as much in there as will keep you from stressing out if the market goes down or you have a big expense come up (leaky roof? rotten deck?). Money in an offset account is returning - tax free - the mortgage rate so is a pretty good investment anyway.
For a younger person without those responsibilities it makes sense to look at how much your typical expenses might come to in a month, then double that. This become your "cash on hand" threshold. You then set a threshold for savings so that once you get XX dollars above the threshold you invest everything above the threshold into diversified shares.
Lily spends $3000 per month on rent, food, car servicing, hair products and faberge eggs (her guilty pleasure!). She therefore sets her "cash on hand" threshold at $6000. She earns $4000 per month after tax, meaning she saves $1000 per month after expenses. By saving like this Lily could get to her $6000 threshold in 6 months, then set her investing threshold as $9000. Every time her bank account hits $9000 (roughly every 3 months) she invests every dollar above $6000 into diversified shares. Simple, easy, and over the long term (20+ years) likely to produce amazing results. With this method you always have between 2 an 3 months of expenses in cash, plus maybe a credit card, in case of emergencies.
You can have separate accounts, for example the "cash on hand" account and another that you use to save towards the investment. Do this if you don't trust yourself not to see the "big" numbers and splurge too much. Or you can just keep it all in your normal savings account if you want to make it easy.
Just make sure to include some fun money in your monthly expenses - you're only young once so enjoy yourself! You can also cycle through credit cards building up points for flights, hotels etc. so that you are not saving money but also building up holidays as well. Don't miss out on life just to save money. Remember that money is pointless, it just buys you time and opportunity. Investing early and hard means you can career change, raise a family, take a year off etc. much more comfortably in your later years. But investing too much means you miss out on life.
One of my favourite blog posts - which lead to one of my favourite books - about what money is
The Psychology of Money · Collaborative Fund
This is a good one about how no one wishes they worked more or had more money when they are on their deathbed
The Nothingness of Money (moretothat.com)