If you have an expectation of growth in your investment, forget cash! I am referring to cash investments such as money market accounts, interest bearing checking accounts, savings and certificates of deposits. It is merely a parking space for short term savings! Investing is expending money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property or by using it to develop a commercial venture. Where is your cash?
I am not suggesting to stop saving! Saving was my strategy to success. Savings is the portion of disposable income not spent on consumption of consumer goods, but accumulated or invested directly in capital equipment or in paying off a home mortgage or indirectly through purchase of securities. More simply, money put aside for the purpose of future use. Most financial bloggers are always suggesting emergency savings for those unplanned or unexpected expenses.
Emergency savings usually is six (6) to eighteen (18 months of expenses. If I use fifty (50) thousand dollars as average earnings, your emergency funds should range anywhere from twenty (20) thousand dollars to sixty (60) thousand dollars in emergency savings. That is a lot of money to keep accessible for an emergency. Do you really need all of it to be accessible? The key word is accessible! How much do you really need accessible and how much could be working for you in the stock market or elsewhere?
How much money do you really need for emergencies? The rest could be laddered in CD’s and eventually in longer term investments. My savings (cash/interest checking account) is just a few hundred dollars. More specifically, the portion of my earnings not set aside for my monthly expenses. My emergency funds are minimized because of a great deal of planning and access to laddered assets. I can use my credit cards for sudden expenses which will give me thirty (30) or more days to solve the problem.
Rethink your savings!
Most rich people have their money working for them all the time. I want to have my money working too. I can use my (low interest rate) line of credit so I do not incur (14-188% interest) credit card. Last, I can sell stock to take care of the emergency. There are enough safety nets that I feel comfortable with this strategy. In addition, part of my budgeting process is planning for emergencies. Most emergencies are known if planned properly. If you drive an old car, you should expect unplanned repairs.
As you accumulate more and more assets, you need to do the planning to protect them. It may be insurance, savings or planning. In business, we call this risk management. Risk management is the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact. I often apply business strategies to my personal finances because it makes sense! I do not want my business or my personal finances to go bankrupt!
What can you do?
Where should you put your savings? Your first step is to figure out how much you need accessible immediately or within thirty (30) to forty (40) days. It is sort of the planning you should do when you figure out how much life insurance you need. If I died suddenly, my wife would need sufficient money to pay the mortgage and other expenses until she received the insurance check. The same planning is necessary for your emergency savings number.
The rest of your savings will have different priorities or maturity dates. You may need two (2) or three (3) thousand dollars in a savings account, but access to much more over time for those unplanned emergencies. What are your circumstances? Do you have a lot of assets or access to cash if you need it? Is your job/career stable? Is your debt low or under control? If you lost your job tomorrow, do you have a plan or are you one paycheck away from bankruptcy? These answers determine what you do!
Similar to any savings you may need in five (5) year or less, you should be more conservative with the investments. For example, I would not invest fifty (50) thousand dollars in a volatile stock or fund because I want to be assured I will have those funds in five (5) years. I would hold these investments in a brokerage account where there are no penalties for withdrawal early. The exact choice of investment is based on your personal risk tolerance and need priority.
If you have several layers of safety, a secure job and a solid plan, you still want to assess the investment risks. I set up a brokerage account seventeen (17) years ago and never needed to liquidate the investment. In the meantime, it has more than quadrupled in value. The stock market is not the only choice, but certainly the most liquid. You can sell your stock and have cash within just a few days. Homes, businesses, collectibles, etc are not as liquid.
I tried to offer a different perspective on a long standing personal finance rule. I hope I am stimulating thinking and discussion. I have spent a lifetime trying to reach my financial goals. I managed to achieve it early (38 years old) and now I want to share my strategies and insight to help others achieve it too. Rich successful people keep their money working and growing. What are you doing with your savings? Do you consider cash an investment?
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