“When people talk about cash being king, it’s not king if it just sits there and never does anything” — Warren Buffett.
If I mentioned Scrooge McDuck, what image would come to you? You’d likely remember him gleefully swimming through his gold coins, giddy with knowledge of his wealth and power. Similar images of excess are everywhere in our media: cash piles, money trees, coins raining down. An abundance of cash implies status and comfort, a cozy sense of security. It’s hard not to feel a genuine love for the stuff.
We work hard to build our solid cash houses, brick by brick. But once those houses are built, what should we do with them? Experts from the business world appear to be of two minds. Some believe that cash is king, others that cash must be put to work and allowed to grow. Who is correct?
Well, as usual, both sides are. A solid financial plan requires that you have both a safe store of cash and investments that can grow. Cash absolutely is king when it comes to having security in your life or business. With sufficient cash, you won’t need to borrow when you encounter one of those expensive surprises so common in everyday life. And in business, cash can be a lifesaver when your cash flow suddenly becomes a trickle and you need to make payroll. Sufficient cash will allow you to make solid, well-considered decisions without the worry of being pulled into a rabbit hole of debt. Typically, cash is peace of mind.
But cash has negatives as well. How does holding cash help if you’re trying to build for the future? Money sitting in the bank doesn’t grow very much nowadays; you are lucky to get a 0.02% yearly interest rate in an insured account. That won’t get you anywhere near the always rising cost of living.
As with nearly everything else, you must strike a balance. You must have enough ready cash to take care of most emergencies and last minute expenses, but also find ways to achieve reasonable growth so your dollars can keep up with inflation.
So where can you find potential steady growth? There are many options, including high yield savings accounts, CDs, bond funds, stocks, real estate, etc. — the list is endless. The first thing you must consider is how much risk are you willing to take, and with what portion of your money. While many people are comfortable with enough cash to weather three months of expenses, others will need a larger stronghold to feel at ease. Different circumstances, and different temperaments, will dictate such matters. (I’ve read that Elvis Presley always kept a balance of a million dollars in his checking account — fifty years ago!)
There will be compromises, of course. You might find yourself venturing a bit out of your comfort zone, but if you’ve correctly evaluated the risks involved, then any unexpected problems can be manageable. A good adviser can help immeasurably here. We spend hours trying to get these balances right for our clients.
Occasionally people will come to our office and admit they have over $100,000 sitting in cash. When we ask why, they invariably give the same answer: “I don’t know where else to put it except in a savings account.” By the end of our interview, after going over present needs and future goals, we will often be able to prepare a better plan together. Perhaps $20,000 of that money will remain in cash, while the rest is better invested in different stock and bond mutual funds, with different goals, risk allocations, and levels of liquidity.
Planning the best use of your cash can be tricky. Let us help you cross that tightrope. You can visit our website at www.onevisionretire.com to learn how to book a no-obligation meeting where we can discuss any cash conundrums you may have.
Investing involves risk including loss of principle. No strategy assures success or protects again loss.