The next time you look at your financial assets, I ask that you not forget about your cash.
Cash has become the ugly stepchild of the financial world over the last few years. We cast it aside, look at it crossly, and ask it why it couldn’t generate more than 10 cents of interest in the last month. We then ask ourselves why it’s necessary to even have any. Think of the investments that can be bought with this cash or the cars or the houses. At least we’ll get something of use.
Other investments will wine and dine us with their juicy yields and their capital appreciation potential. These investments may help grow our wealth and they keep things interesting. Cash is unfortunately not able to join in this party. However, parties have a way of ending; often abruptly. They will re-start eventually, but all of the wining and dining can lead to some intense hangovers.
Cash can’t stop the hangover, but it can lessen its effects; bridging the gap between the last party and the next. It may not provide you any yield (although online savings accounts would beg to differ), but it will be there to cushion your fall and to aid you in difficult times. Cash is that neglected friend we forget about until something bad happens and we realize we need them more than ever.
I simply suggest that you keep cash as a meaningful part of your lives remembering that you may need it one day.
For individuals, anything less than 6 months of expenses in cash may not be enough. Having one year’s worth is not too much and will win you this advisor’s admiration. Businesses should rely on cash for much of their working capital understanding that rapid growth could create as much of a cash need as a decline in revenue. Those banks are a fickle bunch. Don’t rely too heavily on their lines of credit as they may take them away just when you need them the most.
Even very aggressive investors should have a 1-2% of their portfolios in cash and I would argue that retirees need much more. Cash is often the last man standing during crisis and during difficult times. It can act as dry powder to buy distressed assets or simply as a bridge to satisfy current income needs. With enough cash on hand, you will never be forced to buy an asset and you will never be forced to sell. It not only provides you with a cushion, but it gives you control.
So next time you look at your cash, don’t get cross with it and please don’t kick it to the curbside. Treat it like the friend that it is. Not the friend that takes you on the fun day trips and the exciting late night parties, but the friend that will be there for you when all the chips are down.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.