Is Cash Always King?

Seasoned debaters know that a persuasive argument isn’t about being right or wrong, rather it comes down to delivering your points in a compelling, efficient, and strategic manner. There are many topics in the financial world that have spurred such debates over the years and the effectiveness of cash has certainly had its time in the limelight.

Without further ado, the question you’ve all been waiting for: is cash really king?

A look at both sides of the coin.

It should come as no surprise that people have different opinions on the role cash should play in your finances.

The “cash is king” crowd argues that the world is predictably unpredictable and this underappreciated trait can leave people with a false sense of security in the event of an emergency. Everything breaks, so how will you fix it?

On the other hand, the “cash is trash,” proponents say it’s better to put more assets in markets that yield an average 7% return as opposed to banishing your assets to a dismal 0.1% return in a money market or similar account.

So, which side is right?

Our answer: both. Amassing a proper cash reserve can bring flexibility to your finances, but oversaturating your account with too much cash can hold your finances back. Let’s take a look at a few ways you can find the right balance for you.

You don’t always need a reason to save.

Comprehensive financial planning is all about making intentional decisions with your money to support the many other elements going on in your life. We often talk about saving with a goal attached to it, retirement, kid’s education, vacation, etc. but all of your savings don’t just go to the things that you plan for.

Think about it, most times you need cash in a pinch are for expenses you never could have foreseen, a trip to the emergency room, busted water heater, failing engine, unexpected travel, etc. Saving doesn’t have to come with a concrete reason, rather it can be a cushion when life pulls the rug out from under you.

An emergency fund with 4-6 months of living expenses helps you save for the things you can’t predict or even comprehend now. It’s important to save for the unexpected and unthinkable.

A strong cash reserve helps weather storms.

The right amount of cash can protect your assets in the event of a job loss, pay cut, unexpected health problem, intense market volatility, etc. Having that cash on hand can also keep you from going into debt (adding insult to injury in tough times).

Everyone’s reserve will look different. Those with unpredictable income, business owners, and large families might want more in cash, adding extra protection in lean times. Keep in mind that your need for cash will likely fluctuate over the years depending on your stage of life and financial responsibilities.

The COVID-19 pandemic may have forced you to re-evaluate your reserve. The past year may have illuminated your need for more cash. It’s important to be honest with yourself about what you need and that you do what you can to protect yourself and your family.

Trust us, when something unexpected comes up, you’ll be grateful for your diligence and foresight to build a safety net.

It can save you from amassing unnecessary debt

A down period doesn’t stop bills from piling up. This could lead to putting expenses on credit cards, taking out a personal loan, leveraging business assets, or even borrowing from family members. Cash can protect you from taking on more debt, and Gen X in particular needs to be careful about their debt accumulation.

Clients that didn’t follow our lead have ended up using credit cards and home equity line of credits HELOCs for short term cash crunches. These strategies may work for a couple of weeks, but can be a harbinger of financial danger in the long-run.

Cash makes investment forecasting irrelevant

No matter how convincing someone sounds over the phone, during a webinar, or in a book, they can’t and will never be able to time the market. Markets react to many stimuli and this process can’t be mapped or charted like the weather segment on the 11 o’clock news.

Your investment plan takes time, care, and diligence to build. Retaining the appropriate mix of cash can provide space for your investments to weather market volatility.

Think about cash as a back-up generator. If a big storm hits and the power will be out for a couple of days, your generator keeps the food in the fridge fresh, the water running, and appliances operating. The right saving metrics give you the resources to wait out the storm and give your investments the time they need to work out.

Cash can help you keep the lights on, so to speak, as opposed to fumbling for matches and candles in the dark.

Liquidity creates opportunities.

Holding cash reserves brings flexibility and freedom to your financial life.

Take interest rates at the height of the pandemic as an example. While federal interest rates dropped to near zero, interest on commercial loans skyrocketed by 10-12% to account for increased credit exposure. This means that without cash on the sidelines, it was unlikely that you could take advantage of the huge sales in real estate or equity markets in March and April of last year, since the cost of borrowing for the public actually increased over this period.

Cash is also a valuable asset for aspiring business owners. If you have a great idea but no cash for start-up funds, you might need to find a partner to pick up the slack, and, of course, split the profits.

The right cash back-up can also save you from taking on unnecessary personal burdens like getting a part-time job you hate or adding to your count of sleepless nights. It’s wise to protect yourself with enough cash to be flexible with your money when need be.

How much is too much cash?

The amount of cash you have should be dependent on your needs, goals, and personal situation. You might want to accumulate cash on a “slow and steady” basis or you might want to rapidly build cash to free you up to take more risks.

The debate between “cash is king” and “cash is trash” is a volatile one, but your position on the issue should take your personal and financial needs into account. Strike the right balance that works for you, then invest the rest.
Need help determining how much cash is right for you? Schedule a time to talk with us today.

The post Is Cash Always King? appeared first on Bienvenue Wealth LLC.

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