💸Why Liquidity Is Never Overrated. Cash is King.

If we’ve learned anything during this pandemic, it’s not the new spin on the banana bread recipes or how to build a fort, it is why you must be prepared for the worst and hope for the best. The rule of thumb when it comes to emergencies is to always have allocated money, most commonly 6–12 months of cash (liquid) to stash into an emergency savings fund. This money cannot be used for discretionary items or daily purchases, only emergencies that are unexpected but eventually predicted. The younger and less experienced we are, the more naive we are to believe cash is there to keep us afloat.

And it is understandable. Cash not only loses its value over time due to inflation but doesn’t grow that much in a savings account, CD, or treasury bond. About .01% to be exact. So your only option for quick cash compared to physical cash is from the stock market but that leads to even more problems we will discuss.

Especially Millenials or early GenZers who believe in the rich quick schemes and gamble with each other to see who has the most money, fall into the trap of having too little cash when a pandemic, flat tire, or pipe breaks in your apartment. It is fascinating to read that compared to men, women not only make higher returns in their portfolio with more cash, but they also save more, consult with a financial advisor, have less debt, and are in better situations during economic downturns. I’m proposing that this is due to the case that we are more risk-averse (more cash-heavy) despite living longer which doesn’t really make sense since more time = less risk you can take. But as women, we don’t treat money as a game and know it is necessary to be prepared. For sure there are men that are responsible with money and believe in cash, but when it comes to the majority of them, women can sniff a problem a mile away.

As a result, I recommend 5–10% of your net income in cash and 2 years worth of it, not 6 months because that is not only too little time to find a job and fix life problems, it is not realistic for the economy to recover in that short amount of time.

Perspective Problem

What is certain is uncertainty and as animals, there is nothing more than we hate than change. The worst stance to take as a money manager is to be too optimistic. Yes, over time all of the indexes go up but we cannot fast forward in time. We must ride the waves or the volatility, whether we like it or not. The worst decision to make is not to invest in all.

Assuming that nothing bad might happen eventually is like standing up as a passenger sticking your head up in the sunroof while driving. It can be done but there are serious risks if you brake suddenly or go on the highway. Being too optimistic means that you aren’t weighing your options and as a result, not aware and careless. Instead, turn your attitude to being cautiously optimistic, as I like to call it realistically pessimistic. Being cautious about realistic about the future will allow you to not only be in a better spot financially but mentally and emotionally as well becuase money can trigger a high amount of volatility when it comes to our well being that can all be prevented by putting cash aside.

Cash’s Promise

But doesn’t cash put you in a worse financial situation? How does it make me more secure? Since cash is the best form of liquidity, there is no hassle or extra work needed to convert it into liquid form without losing money against the market price, and allows you to use it immediately, not waiting a few days to sell your other investments.

Liquidity is vital in any situation, whether you are a company or individual looking to pay off short term liabilities, debt or in the pandemic’s case, have money saved up in case of an emergency, it only hurts not to have it. My recommendation is to have 5–10% of your net worth in assets, regardless of your financial situation, except if you are the richest man on Earth and savings most likely isn’t necessary in your case but even in that situation, if a competitor comes around and all your assets are allocated into Amazon stock, beware! No less than 5% or more than 10% because those scenarios will hurt your chances of growing and sustaining wealth. With less you are getting risky needing to tap into your 401k, ROTH IRA or 529C dedicated accounts that are helping you build your growth and with too much, you are losing money.

The smartest personal finance consumer believes cash is really king. So let’s first discuss the misconceptions from the riskiest and ironically poorest people about why so much cash isn’t needed:

Can always sell investments for cash

On a snowy night when you get into a car accident driving home from a party or quickly need cash to pay for an unexpected medical expense (the #1 reason people go into debt), the last thing you want to think about is how will I be able to afford it? Cash not only is there always sitting, depreciating but still there for you to use, it is a lifeline.

People don’t pay attention to the smartest ways to sell your stocks, usually only how to buy them. Since only 40% of the population can afford an out-of-pocket $1k charge and 60% are invested in the stock market, these individuals, in particular, shouldn’t be focused on their Tesla gains, if they cannot pay a basic expense or get into trouble. There are many different ways to sell your stock if you decide it isn’t performing the way you intended it on doing and in that case you would either issue a market, limit or stop order or work with a financial advisor, which typically executes within 24 hours. Depending on the timing of the incident and how fast you need to supply the cash, that might be too late and of course, the dreaded fees of selling investments come with that as well. Remember, you cannot plan to sell your investments at a low when an emergency comes. You only pay taxes on a high and gains always happen over time. Online broker fees range from $5 to $15 a trade or 1–2% of the value of your account. That surely adds up more than the value of cash.

Contact a friend, neighbor, family member, colleague, etc. for help

Connections are everything in this world. Most of the time, if you want a job, you have better luck meeting an employee at a brunch networking event, getting to know them and check-in every few months, bring them a holiday gift to show your thinking about them and before you know it, eventually help you cut through corners to land you a job.

Rapport is looked upon 10x more highly than any boring resume because a piece of paper can only say so much about a person. It is hard to differentiate if someone is lying and what they are like. Being personable and relatable in a team is more important than your IQ.

But at the same time people can be nice, but that doesn’t’ mean they will help you with your financial situation. If there is a crisis, they are most likely struggling as well. How many times did your friend tell you they would pay you back and never did? After a while, you not only stop hanging out with them, you never get your money back! And don’t assume this is just for people on a budget. The more money you have, the better chance you’ve worked hard for it and know how to manage it more than someone who has less. As a result, they will even be less willing because they know this tricky game of lending. As a result, no one will be able to help you. Never rely on others because with our finances instead just for moral support. We all are fending for ourselves these days!

If I don’t have cash, I’ll just cut back on spending

Plausible point but after you’ve eliminated those subscription services, eating Ramen 3x a day, sold all your stuff in your home, what is the point of life? There is a trade-off to everything. Cash doesn’t grow as much but is a cushion to a better life than struggling and realizing that without it it is more miserable. You could have more money invested growing the stock market but if you don’t want to sell your gains when you need cash, then you lost more than if you had proportionately allocated it.

Cash + diversified portfolio > Just a diversified portfolio all in the market

Plus for how long can you go back to your childhood home and live with your parents? It doesn’t matter what people think, it’s not that embarrassing you do you but it’s just a hassle when you need to commute and a quiet space for WFH. Don’t you want to move out of there eventually with just a little more cash? Make your life easier by stop focusing on the returns that will not feel like rewards without a cushion.

Can take advantage of unemployment claims & severance

Something that most people do not understand. You cannot file for unemployment when you either get fired or quit only on a severance, which is compensation and or benefits that an employer provides to an employee once you are laid off. It never hurts to ask for a severance package but the fact that you have to rely on your previous employer to support yourself, is not only awkward and embarrassing on your part, but scary. Depending on how well you are with negotiating and all this business hassle in between, you might not even get a whole lot. You are done with working there and this is just a package to say good job for your time here now leave. When cash is always available, you don’t need to scramble to ask your employer or quit just for extra money. You are independent on your own. The milestones of achieving financial independence.

Side Hustles

With the power of the internet, you can easily pick up a side hustle that can make be considered a lucrative passive income stream. But crucial to remember that most forget: That doesn’t come right away. If you are evicted tomorrow, it is rare you can rake up $1500(typical rent in NYC) by tomorrow just driving Uber unless some party was poppin that night. It is also difficult to sustain yourself handling multiple side hustles all at once. You cannot even afford an assistant at that time. It takes time to build up customers, get a license, get situated with the job, and finally find some good traction which usually takes weeks let alone months or years as with this blog. If I just decided to start a blog intending to make thousands in the first few days or weeks, that wouldn’t have been possible. Passive income takes a lot of time and dedication upfront for no guaranteed reward that someone on the brink of homeless doesn’t have the patience or stamina for when trying to just survive not deal with dropshipping and watching YouTube videos on motivation. That is the last thing you want to focus on.

The most common reasons outlined above on why cash isn’t necessary are the typical answers young investors will tell you who don’t believe accidents happen despite taking the most risks. When you are young, we have more adrenaline and love the thrill of adventure but when it comes to dealing with your money, that is a red flag you need to get caught up on speed with what personal finance involves. It not only is personal so you can never rely on what others are doing that is working for them, but also it is all about achieving your goals long term.

Just like with your career, if you keep starting and stopping new paths, nothing will get accomplished. Stick with one thing because over time and with diligence and patience, you will achieve something, big or small. In history, the market has always been a bullish (on the upside) only a bear and bull combined come through during each of the 253 trading days of the year.

Now let’s uncover the real reasons why allocating 5–10% of your net worth up to 2 years of living expenses in cash is a must:

Emergency, Emergency, Emergency

I keep referring back to the pandemic because it is the most recent and best example of a true unexpected event in modern history. Even the Financial Crisis of 08 and the Dot Com Bubble in the 2000s was more expected since there was already pent up volatility in the markets and banks knew homeowners were defaulting on faulty loans they couldn’t afford. But no one saw a health crisis coming this year since Polio a century ago. With record unemployment, lower GDP, CPI, spending, and overall consumption, the economy is suffering. Since the market is trading in futures, never in real-time, the rich got richer and the poorer got poorer but there was still a sudden downslide in late March when millions of investors starting selling due to fear of the unknown.

At that time, when you lose your job, more bad things start to happen. You cannot afford your mortgage, proper food, utilities, maintenance, can get evicted, your health deteriorates due to stress/ uncertainly and the list goes on and on. The job market is never certain. There can always be someone at anytime that can replace you. It is a scary feeling to realize and shouldn’t bombard you at every moment at your job, just something to keep in mind of when you are feeling ungrateful and have less cash.

Fortunately in my situation, my family was not affected as badly as most Americans. In fact, we are saving thousands more per month. But we still had to divvy to a new plan. Our renter decided to start his startup at the end of February and couldn’t afford to pay his rent so we had to search for a new one throughout this pandemic. Thank goodness the demand for suburban homes and more space + land has never been this high so we had a lot of bids and the highest price to choose from, but if this happened during the financial crisis, if we didn’t have enough cash, we would’ve either had to sell our investments or sell the home which would mean we lost a substantial passive income source that counted as another person’s full-time salary for our townhouse at 12k per month.

To tell if you have enough cash, see how you are doing now. Plan for the worst during the best time so you don’t have to scramble during the worst. When it comes, you might have to cut back on spending and budget better but in order to prevent having no roof under your head or not knowing where your next meal is coming from, cash will always be king.

Privacy Check

Everything online is stored in some database. Ever heard of cookies or stored passwords? The fewer credit cards tied to your name the better because that makes it easier for hackers to get a hold of your information. when I was younger I always thought, why would a scammer want my name? What will that provide them? Oh, honey, that will give you endless amounts of money. In fact, the more vulnerable you are which is usually when you are younger(typically) and may not have much money tied to your name, is when your chances to get scammed are actually at the highest. I have Life Lock. I pay roughly $50 a month. I know pricey for a frugale minimalist like me but it is necessary for to keep sane. Life Lock checks over everything that is displayed online under my name, not have anyone say anything that is untrue, erase any suspicious information, and not have my address, SS, birthday leaked online.

Incidents

Just by not crossing out your name on the mail, can lead to a host of problems down the road. With your name, they are able to look up your address and then with a hold of your mail, can see where you shop and then open an account in that store or act on your behalf to purchase something. It is a dangerous world out there cough cough Russia and China. Cash will protect your privacy when you not only pay for things but keeping your data secure so you don’t have another account tied to your name at a store that you just visited once. When you send out a birthday check in the mail, that could easily be stolen. Send cash instead because it will usually be a smaller amount and if it gets stolen, it isn’t a whole lot and nothing is associated with your name because it doesn’t belong to anyone except the US government.

Adds Up

No one has cash these days. It’s an annoyance plus during COVID, it is just nasty to carry around. On average, 1200 people have used the cash that you have in your wallet before you. A bill is dirtier than a toilet seat. So I probably convinced you just now that cash is nasty but is really generous to your overall wallet, in a different sense. By spending cash instead of your flimsy shiny beautiful card, the fact that you are counting the bills and physically handling them as opposed to paying via your phone or with a piece of plastic signifies you will become more aware of the amount you are giving and might have second thoughts when paying. If you don’t have enough cash in your wallet, then you won’t buy it, which is usually for the better! With your card, you can even purchase stuff if you don’t have the money. The secret power of the bank. Robbing your money. Then you have officially become part of the 80% of Americans with some sort of debt and credit card debt, in particular, is under the ‘bad’ debt category because it not only depreciates in value, the interest is enormous over time and if you have too much or forget to pay payments off in full, entities and your bank can easily withdraw money on your behalf. When you have debt, someone else owns it and plus interest made on it. Unless it is paid off, then you don’t owe anything. Resist the temptation to spend, look for those bargains, and your wallet will thank you.

The wealthier you get, presumably as you get older, the more cash you will need on the sidelines as you aren’t relying on a stable job anymore in retirement and cannot afford to take as big risks in the market or in general since you have a shorter time span and cannot erase those losses with gains that all take patience and time, something that is limited in old age.

In addition, the wealthier you get, the more opportunities and money is tied to your name which means it can be theoretically easier to take bigger bets that can harm you at a larger expense than someone with less. You assume with all of these assets, I can afford to take a big hit because I have a steady cushion. You never want to fall into that classic trap that college athletes or movie stars with no education get into. Living below your means can always provide a happy existence. You really don’t need much in life to be happy and people are less transparent than you think.

The Joneses’ you keep comparing yourself to, are worse off than you presume. We hide what doesn’t look good and show off what does. It’s part of life and now online. We never want accidents to happen but just like with insurance, it is there to give us peace of mind and some sanity if something does go wrong without affecting our lives or dipping into any other fund that is growing. Debt, bankruptcy, poverty, and failing to monitor your cash are paths to financial ruin which can all be prevented by debunking the risky myths of having none and taking care of situations when they happen because when they do, expect to pay double out of pocket costs, go through possible legal and business trouble and then maybe you will eventually learn that having cash on the sidelines is will keep you afloat. Don’t let anyone ever tell you otherwise.