When you are a fiduciary and do not make any commissions like me, you are free to give honest advice about a subject many planners do not want to discuss: Cash. Any planner that makes his/her living by commissions would never want you to have cash around, you have to invest it and make returns on it (and commissions for the planner). The financial infotainment industry is the same. Books, podcasts, and tv shows all want you to invest, cash is boring and does not sell advertising. They tell you its downright stupid to sit on a bunch of cash.
The refrain is the same:
- You’re not making any return.
- You’re losing money to inflation.
- You’re too conservative.
First, of all. Always know how the person who is advising you is paid. Also know that well-intentioned friends sometimes want to sound like they know what they’re talking about because they listen to the latest podcast from some hedge fund guru. Disagreeing makes them question their own beliefs. Oops, ego bruising.
Here’s my advice on how much and when to keep cash. Always have the following in cash/cash equivalents:
- $3k for “stuff” that happens like car/home repairs, emergency flights, etc.
- 3-6 months of expenses for a total loss of income (i.e. job loss, divorce, disability)
- Enough for an expense coming IN THE NEXT 3-5 YEARS like a replacement car or bathroom remodel
Okay, now you ask WHY does it have to be in cash. You can sell equities or bonds with a mouse click. You can appreciate why you would not want to tie up cash in an illiquid investment like a condo or boat, but why not equities, bonds or even commodities like gold. You can have cash the next day when you sell.
- Market risk – you lost your job in a bad economy and need cash. The market is way down and you have to sell.
- Taxes – if you sell a holding in a gain position because the roof just caved in, you may owe capital gains on it
- Psychology – Don’t feel as secure without cash and/or you’re nervous about liquidating securities.
The third reason should not be dismissed. If you invest your cash and you need to replace the water heater, chances are you will use credit instead of selling equities to do it. We’re all like that. We don’t see investments as cash, because they are NOT. You subconsciously know there is an additional cost to selling investments to pay for a home repair and you avoid it. Also, if you happen to remember 2008, you might remember that you wanted CASH, not bonds or equities. It’s the one thing that makes everyone feel safe.
Get comfortable with having cash around. Consider short term CDs, money markets or high yield savings accounts, in order to keep pace with inflation, but be savings secure with some cash.