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 is incredible. Cash will maintain it’s value even during a stock market crash or anything similar.
[Related Read: Get Over Your Fear Of The Stock Market And Start Investing]
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 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 orrur and you have money in your checking account to pay for it, no worries. You can pay those unexpected expenses with your cash fund, instead of going into credit card debt and paying 20% interest.
[Related Read: How To Build Up Your Emergency Fund]
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?