Why Cash Is King

3 06 2010

Source:http://www.moneycrashers.com/why-cash-is-king/#utm_source=rss&utm_medium=rss&utm_campaign=why-cash-is-king
With new investment products hitting the market daily, the importance of holding cash is often overlooked today. Other investments such as gold, silver, and other metals are often touted as the best places to store your reserves. As the latest economic crisis proved, cash is still the king. Even with inflation and/or deflation a possibility, there would have to be a colossal melt down from our economy for cash to be worthless. Here are a few reasons why you need to keep some cash parked in your bank account.

Rainy day fund

As I am sure that you already know, everyone needs a rainy day fund. A rainy day fund stocked with cash will keep you from having to go into debt to pay for unexpected expenses. As we all know catastrophes often occur at the worst possible times. You never know when you will need to buy new tires, replace a hot water or buy a new refrigerator. Doesn’t it make a whole lot more sense to borrow money from yourself interest free than to pay 15 to 20% to your credit card company?

Investing decisions

Having cash on hand keeps you from panicking and selling off an investment at the wrong time. Look at the real estate market and stock market of the past few years. Investors often make the mistake of buying high and selling low due to low cash reserves. Warren Buffett has referred to cash as the equivalent of financial Valium because it keeps investors cool, calm, and collected. You always want to make investment decision when you are thinking clearly and not make decisions driven by emotion. The best investment opportunities often reveal themselves when credit is tight and access to capital is limited. Cash allows investors to take advantage of market downturns when other investors are cash poor.

Liquidity

Tons of television commercials will tell you that gold is the best safe haven for your dollars. That is because people tend to flock to gold during times of fear. While gold may deserve a small place in your investment portfolio, it is a highly illiquid asset. You won’t run into too many grocery stores that will take a gold bar as a form of payment. There are not too many creditors that will accept gold as a payment. You would be hard pressed to find any asset that is more liquid than cash. Cash can be used as a form of payment or stored in an interest bearing account. Liquid investments like savings accounts and money market accounts are better than gold in my book any day of the week. Buying gold is laden with fees from gold brokers, and there are VERY few reputable gold brokers out there. If you want some because you believe in its power to be the only financial backing of paper money, I’d keep 10% or less in your investment portfolio.

To be perfectly clear, I am not suggesting that you dig a hole in your backyard and bury cash or store it in your mattresses. I am suggesting that you hold onto a sufficient amount of cash so that you provide yourself with a cushion. This cushion will not only protect you against emergency situations and job loss but provide you with capital to invest during market crashes (real estate, stocks, bonds). As you can see, investments will come and go but cash will always be king!

How much cash do you think a person needs to hold to feel secure?


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