Updated: July 28, 2023
We’ve had quite the ride over the past few years between wild volatility in the markets, high inflation, interest rate hikes, and a freaky-hot housing market/housing shortage.
You name it and it seems like it has happened!
And yet throughout it all, there is one friend that we can always count on: CASH!
Cash gives you flexibility.
You can zig when others zag.
You can zag when others zig.
Cash is FREEDOM – and that is why cash has been and always be the King.
Forget Emergency Funds. Save for Savings’ Sake!
The classic financial advice is that you should save for an emergency. On this, I agree.
Emergencies can and do happen, and you need to be prepared.
You should have an emergency fund, and it should be at least 6-12 months’ worth of cash.
Having this much saved is going to help give you breathing room for real-life emergencies, from car accidents to unexpected medical bills, from a new roof to the loss of a job.
Having 6-12 months of expenses in the bank will give you peace of mind. You’ll sleep better at night.
But if you want real freedom, if you want to work towards financial independence, then the best thing that you can do for yourself is to save for savings’ sake.
Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment
– Morgan Housel, Psychology of Money
You don’t need to save for anything in particular.
You just need to save.
The more you save, the better you’ll hedge yourself against life.
Before I had ever read Morgan Housel’s wise words on saving, my wife and I instinctively held 2-3 years’ worth of cash at all times.
It wasn’t always this way, but over time, we built up our cash cushion to give us the hedge we needed against my entrepreneurial career – and life in general.
Cash is the Queen Bee.
Beyond sleeping better at night, there is an even better reason to hold a seemingly ridiculous amount of cash in the bank.
Financial reasons.
In what world does anyone ever want to sell off stocks and pay capital gains for an emergency? Zip. Nada. Zero. None.
It doesn’t matter what reality you live in, you don’t want to sell any of your stocks at an inopportune time.
We all know that you can’t time the market, and so why should the need to liquidation be any different?
Time in the market > timing the market
Ideally, the best thing you can do is leave your investments alone for a very long time.
You buy and hold. Never sell.
Morgan Housel has a similar mindset to ours when it comes to saving. On carrying up to 20% of his net worth in cash, he says:
We do it because cash is the oxygen of independence, and -more importantly- we never want to be forced to sell the stocks we own. We want the probability of facing a huge expense and needing to liquidate stocks to cover it to be as close to zero as possible.
– Morgan Housel, Psychology of Money
It is plain and simple. You never want to be forced to sell off stock.
The Jack and His Cash Bucket
Holding a large amount of cash gives you a large margin of error for just about anything.
In early retirement, a cash bucket can help to reduce your sequence of return risk and support you with monthly paycheck.
When pursuing financial independence, a big cash buffer keeps your investments humming 24/7 despite life’s circumstances.
The cash wedge will also help you to manage the volatility of the markets.
Whether you want to call it a cash buffer, bucket, or wedge, there is one thing in common with this strategy. Cash!
The Joker and His F-You Money
But beyond the logical financial reasoning for holding cash, the biggest benefit is that of the Joker and his F-You Money.
When you hold a few years’ worth of expenses as cash, the world is yours.
Hate your boss? Quit.
Want to move to a new location without a new job? Go for it.
Overspent a bit one year? Not a problem.
This much cash gives you greater flexibility. For me personally, I would have never attempted to take my mini-retirement without it.
JL Collins, of course, calls this F-You Money.
When you have F-You money, you don’t have to work for anyone you don’t want to.
When you have F-You money, you have enough to make a big leap, on your own terms, whenever you are ready.
I may not have known at first what it was called, but I knew what it was and why it was important. There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect.
– JL Collins, The Simple Path the Wealth
JL might wasn’t specifically referring to cash. But the feeling is the same.
When you have a massive margin of error, you gain confidence to live the life you really want to live.
You can try new things, and take risks you otherwise wouldn’t have.
Having F-You money allows you to play the part of the Joker. That is living life on your own terms.
You don’t have to always act prim and proper.
You can choose to lead the life you want to live and you can build your arsenal of automatic no’s.
BUT … [[Insert Excuse]]!
Count on the fact that your cash may never do anything but lose value.
That is part of the game.
If you are investing in real estate, the stock market, crypto or elsewhere, it won’t matter.
You’ll get your returns.
The point of holding a large amount of cash is both financial and mental.
Moreover, as you grow your investments, the percentage of cash you hold will become less and less anyway.
But the key factor is that you’ll have something that not many people have…and that is flexibility!
Cash Remains King
Cash is your hedge.
Cash is your F-You money.
You’ll zig when others zag.
You’ll zag when others zig.
Cash is your FREEDOM and your independence.
Cash is the Ace up your sleeve!
Totally agree as long as you have investments that have a reasonable chance at covering your long term needs. My MIL had enough cash but had a forced retirement (disability). She lived off her disability payments and cash but unfortunately inflation ate away (costs rose) and her cash dwindled – now she’s not sure she’ll have enough. The sad part is she would have been in great shape if she was only 40-50% in an stock index fund but no, stocks are to risky (according to her). So now, she’s not sleeping well at night…
Yeah the whole point of a cash wedge/buffer is to use it as your defensive positive that offsets your equity and more aggressive allocations. My cash allocation is to aim for about 2 years worth of expenses, and that should get us through any recession without having to pull from any equity allocations or make ill-timed moves.
I like the poker analogy. Cash is always king in times of recession.
To me, cash is the perfect thing to hold to reduce sequence of return risk. Hopefully no recessions will come, but better safe than sorry for me!
If you have a secure job during your working years (like I had) there is no need for cash. We paid of our house, invested everything else and retired when we had enough. Now we are still 100% invested in dividend paying equities and don’t have to sell any shares for income. A line of credit on the house is the emergency fund. Not everyone is in a position to do this, but also not everyone needs a cash wedge. To have a years worth of cash sitting idle could be so much more income. Now that our dividend income exceeds our needs and cash is building up, I’ll have to come up with a new plan. But having cash sitting idle for years is just not something I can do
I respect that. A HELOC is a great way to give yourself that cash buffer you’d need. I’ve always been more conservative in terms of my cash management, but I also wanted to make sure that in the event that a job/business went away, I had plenty of time to figure out the next steps and not have to feel rushed in the least bit.
We also use our cash wedge as the defensive part of our portfolio. As such, we hold little to no bonds. Perhaps at some point we’ll be in a similar positive where passive cash flows from dividends are more than enough to support our expenses, but I imagine that will take some time given a majority of our investments are in index funds.
Couldn’t agree more and I love the analogy used throughout.
Piece of mind in retirement is what we are all looking for anyways. That’s the end goal of this journey right?
100% – and I believe that peace of mind is what you want even on the way to retirement. You always want to sleep well at night, and for me cash is THE way!