Confession time! I hold on to lots of cash. It’s something that not everyone is a fan of, but it’s something that is going on in my life right now. The sentence: ‘Cash is king’ is an old metaphor often used. Cash can make your life a whole lot easier.
I have my emergency fund set up – where is about $3,000 in cash. Besides that, I have some short-term savings account where I keep additional money. In total, I would say around 30% of my money is cash in the form of my checking and savings accounts. Am I committing a personal finance sin?
I have my own reasons for keeping my cash, one of them is my mini-retirement #2 in September 2019. I will be traveling for 3.5 months to Central America, so I need my cash to pay for my trip.
Isn’t it better to invest all my cash and enjoy the ride? It’s good to have a big chunk of money set aside in stocks, bonds, and your retirement accounts. This will make sure your account grows over time – with compounding interest. But it’s just as important to keep your money liquid. Liquid money is easy to access and is not subject to market gains or losses. We’re talking about savings, checking, and hard cash.
Even with the interest rate around zero, there is a place for cash in your portfolio. Let’s dive into the key reasons why cash is king!
[Related Read: 11 Lessons Learned From Warren Buffett]
Why Cash Is King
1. Peace Of Mind
If you’ve invested for over 12 years, you have been through a stock market decline. I haven’t, but I can imagine it will hurt to watch your portfolio value go down and down. I can imagine that the very worst thing is having to sell those declined assets because you really need the money.
Imagine that you see your portfolio drop 20-30%, like that December drop, and you didn’t have any cash in your portfolio. How would you feel?
In order to prevent fear from taking over in these kinds of scenarios, a cash backup might help. If you have cash, you might reduce your urge to do something about the situation (which mostly is selling at that point).
For me, peace of mind is a big part of why I’m keeping part of my portfolio in cash. I’m not only saving for my emergency fund but also keeping some extra cash aside apart from that.
2. Risk Of Losses
If you have cash, you can spend it however you want. You don’t have to sell shares if the market is down and you don’t have to wait for anything to reach maturity.
If you want to let your shares sit in your portfolio and you don’t want to sell them any time soon, this is a good thing. It can also cap your overall losses on your investment portfolio in that way.
Investing is part of a long-term strategy for sure, but the stability that cash offers are incredible. Cash will maintain its value even during a stock market crash or anything similar.
[Related Read: Get Over Your Fear Of The Stock Market And Start Investing]
3. Flexibility
Wait for the next market opportunity and go all-in. If you would have a pile of cash to invest in 2009, when the market hit the low, you would have more than doubled that money by now.
It’s not to say that you should try to time the market, but the fact is that many people are saving their money for when the market will drop another 30% or so. If they chip in at that point in time, they will make a bigger return than people that invested cash on availability.
4. Emergency Fund
Having an emergency fund is a good way to start your cash back up. Once you have a decent emergency fund – it’s up to you how much cash you want to have.
Having money for said emergencies is important. You have to go to the hospital unexpectedly, you have a leaking roof, or you run your car against someone else’s car.
If those emergencies occur and you have money in your checking account to pay for them, no worries. You can pay those unexpected expenses with your cash fund, instead of going into credit card debt and paying 20% interest.
5. Big Purchases
Cash is needed for big purchases, like a car or your home. It’s not only the down payment you need to make to either of these, but it’s also the case that you might be able to buy your car without getting into debt. Radical – I know!
The cash tradeoff: The downside of holding cash. When you hold cash today, your money is not going to grow. At today’s zero interest rates, your cash won’t compound very quickly. Even though inflation is low, you may lose a small amount of purchasing power to inflation by holding cash.
Are you holding on to a lot of cash?
Marjolein is a financial consultant who has built over €4,000 monthly passive income and saves over 70% of her income. Read Radicals’ inspiring story, from stuck in the 9-to-5 to loving life. Feel free to send Radical a message at the bottom of this page
I have enough cash in a savings account to buy myself a new car. I cannot do my job without my car and so I need to be able to buy a new one immediately if mine breaks and I don’t want to have to get a loan. As you say, others would disagree with the need for this, but it is my ’emergency fund’ and I find it reassuring that it is there.
I plan on having enough cash in our savings to cover a year’s worth of expenses. Since my job is entirely commission AND dependent on the market, if things go south I want a cushion so we are not freaking out.
Also, did you mean to repeat your first paragraph?
Hi Sam, it’s a good decision to check out what your specific needs are and act on them. Especially if you want to prohibit to into more debt or taking your money out of the stock market when it’s down, this can be a convenient choice to make!
Thank you, I’ve fixed the first paragraph – you are more awake than I was at the point of publishing this!
& Yes it can be very convenient to have big amounts of cash, preventing a freak out is 100% worth it. It really depends on the personal situation how much cash you need, so it’s good that you thought about that!
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