Broker Check

Cash is King

August 11, 2022
Share |

In my last post, I talked about starting. Starting something new or maybe returning to old starts. When I think about financial profiles, the starting point is often cash. Think about it this way: when you build a house, you must start with the foundation. This step is pivotal to ensure your home is stable and can withstand future detriment. The same is true when building a financial profile; cash is the foundation and can provide for you during times of emergency or opportunity.

At Maleta, we often get asked about cash. How much cash should I have? Do I have enough? Or maybe even, do I have too much cash?

So, let’s talk about it.

How much cash?

The rule of thumb in our world is that one should maintain 3 – 6 months of committed monthly expenses in cash, meaning in a checking or savings account. For example, if I spend $5,000 per month, theoretically I should have $15,000 - $30,000 available in what we call a cash reserve. This money should remain static unless needed for emergencies or opportunities; if used, the account should be replenished back to its original value. One could also argue that if you know of upcoming larger purchases, for example a car, home repair, vacation, etc., that money should also be held in cash to be readily available when needed. The beauty of cash is that it’s important during all stages of life, from starting to build wealth all the way through retirement.

To put it simply, not enough cash can leave you vulnerable. In 2020, we faced an unexpected global pandemic which led to a spike in COVID related layoffs. Those who were able to rely on their cash reserves to cover monthly expenses had more peace of mind and it allowed them time to find new employment.

What about too much cash?

While too little cash can lead to vulnerability, too much cash isn’t great either. Beth always says, “There is no such thing as a perfect investment.” I agree, and I definitely include cash under that umbrella. However, during times of uncertainty, people cling to their cash, and we hear comments such as “cash is safe” or “I am comfortable knowing that my cash is not going anywhere,” or “I don’t know what’s going to happen in the market; I don’t want to lose all my money.” Comments like these were especially common in 2020-2021 and have only continued into 2022 as we experience record high levels of inflation. In unpredictable times, cash feels secure.

And it is true, excess cash on hand is a personal preference. However, too much cash in a financial profile can be detrimental over long time horizons. Cash is cozy and comforting, but it does not keep pace with rising costs; over time, inflation and taxes will diminish your purchasing power. Today is a perfect example of the dangers of your comfortable cash. When gas prices are at an all-time high and traditional checking accounts only offer pennies of interest per month, cash has less power.

So just remember, cash plays an important role in any financial profile and should reflect your unique needs. It is a pillar at any point in life and often the starting point when building a financial profile. But there is no perfect investment and even cash has its limits. Thinking about your cash or know someone who needs help? Reach out.