Over the years, many wise people have said that “cash is king”. The phrase refers to the concept that money (cash) is more valuable than any other type of financial tool, such as stocks or bonds. Having liquid funds available can be vital because of the flexibility it provides during a crisis or times of financial uncertainty.
The phrase, “cash is king”, became popular after the stock market crash of 1987 by the CEO of Volvo. It emphasizes the value of financial flexibility and the ability to respond to unexpected challenges and opportunities.
Cash is a low-yield investment compared to other investment options. Because of that, there’s a lot of debate about how much cash to hold. Most financial experts suggest households have three to six months of living expenses set aside in an emergency fund. This cash should be separate from the checking account. The best places to hold this money are a high-yield savings account, money market account, or bank CDs. Regardless of where you store your emergency cash, it should be easy to access and not easily prone to market swings or losses.
Another benefit of having cash available is so you can increase your ability to make more money. To grow financially, you need to be able to identify and seize opportunities as they come. During crisis times, many assets can become significantly under-priced. Only investors who have cash can take advantage of such an opportunity and buy those assets at their very low prices. When you have cash, you increase your ability to make more money.
Despite our best planning, emergencies happen and it’s important to have cash to meet those unplanned situations. This includes medical or dental emergencies not covered by your health insurance, damage to your car or home that is not covered by insurance, legal issues and the possible loss of a job or pay-cuts. It is important to be prepared to meet these types of emergencies should they arise, without having to take on debt. Accumulating debt not only reduces your net worth, but it also reduces your credit worthiness.
Although investments in real estate, stocks, bonds and gold are great, they are non-liquid and may not be easily accessible when you need cash in a pinch. This means, before you can use the proceeds from the investments, you have to sell them first. If these assets are trading at a price lower than you paid for them, at the time you need to liquidate them, you will incur losses on those investments.
When unexpected situations occur, it may not only require you to liquidate your assets, but it also may force you to charge your bills to your credit cards. While it may appear to be a convenient way to pay your bills, interest rates can put you further into debt if you aren’t paying the credit card bills off within the same billing cycle. This adds to your losses and further jeopardizes your credit. Having cash on hand to pay your bills, saves on late fees, interest payments, maintains a strong credit history and improves your overall financial health.
It goes without saying that having liquid assets can provide a safety net for those uncertain times we simply cannot plan for. With Money Market Savings accounts yielding 5%+, this is a great option to keep cash on hand should you need it, while making more interest than accounts like this have historically yielded, in decades.
If you are considering liquidating an account and worry about the tax consequences associated with this, remember that you will pay the taxes regardless of when you withdraw those funds, except tax rates are as low as they’ve been in a very long time. If you don’t have cash on hand, this might be a perfect time to consider a change so you have some security in the event you need it. If you are interested in discussing options for establishing an account that gives you anytime access to your money, please call 352-751-3016.