﻿I used to think holding a lot of cash was for losers. I thought if I was really financially
savvy, I would have my cash constantly working for me at all times, getting me the best returns.
However, I have learned with time and experience that having enough liquid cash is actually one of
the best things you can do, not only for your emotional, but financial health as well. Hi,
if you are new to the channel, my name is Tae from Financial Tortoise. Where we learn
to grow our wealth, slow and steady. In today’s video we are going to discuss why cash is king
and why I believe holding 6 to 12 months of cash in a liquid account is one of the best
decisions you can make for yourself. First reason why cash is king is that cash keeps
you in the game no matter what happens. If any of you guys have ever bowled as a child,
you might remember using what's called 'bumpers' or 'guard rails.' These bumpers would essentially
keep your bowling ball from falling into the gutter. They kept you in the game even though
you might have launched the ball improperly or your ball started spinning in the wrong direction.
Think of cash like these bowling bumpers. Life will alway throw
you curveballs. Majority of my most surprising curve balls are for some reason related to our
car. It might have to do with the fact that both my wife and I drove pretty worn down vehicles
for the first 10 years of our marriage. One time my car wouldn’t start and the mechanic told me
it would cost me close to $4,000 to fix the problem. Or I would need to purchase a new car.
Now, if I was in a more precarious financial situation and didn’t have cash in my bank account,
$4,000 could have easily kicked me off the game. According to a Bankrate survey, only 39 percent
of respondents said they would be able to cover an unexpected $1,000 expense from their savings.
Most often, people would need to use credit cards to cover the shortfall. Sending most Americans
deeper into a financial hole. In our journeys to debt paydown, investing or financial independence,
there will always be curveballs. But enough cash will ensure that we don't get derailed, and help
us to stay on track towards our financial goals. Another reason I keep cash on hand is because it
allows us to take advantage of opportunities when they arise. Berkshire Hathaway, Warren Buffet and
Charlie Munger’s primary holding company for their investments is known for always holding
more than enough cash. In their 2014 Berkshire Hathaway annual report that they vowed to never
to keep less than $20 billion dollars in cash. When COVID-19 caused a market crash in 2020,
Berkshire Hathaway decided to hold more. Actually way more. $137 billion in cash. And their cash
strategy has served them quite well when it came to being able to take advantage of opportunities.
During the financial crisis of 2008, Warren Buffett was able to pump $5 billion into Goldman
Sachs shortly after Lehman Brothers collapsed. It served as a massive boost of confidence for
Goldman Sach in order to help stabilize an already shaky market. However, it also netted Buffet a
hefty profit of approximately $3 billion - all because he had the cash to do so. We may not all
have $140 billion dollars like Berkshire Hathaway. However, having even 6 months of our monthly
expenses in cash is more than what most people can come up with during times of great opportunities.
Now before I get to a few other additional reasons why I believe cash is king, let me talk briefly
about where is the best place to hold it. The two principles that I want to highlight regarding
the best place for cash are these: security and accessibility. You want your money secure. And you
want your money accessible. The fancy financial terminology for this is “liquid.” And I believe
a simple savings account or a money market account more than serves our purpose. When I recommend a
simple savings or a money market account, one of the main concerns I get from people is that it
doesn’t earn them much interest. I’d like to argue that interest rate actually shouldn’t matter much
when it comes to keeping enough cash. Because the goal of this money isn’t to grow. It is to give
you other benefits. However, this doesn’t stop many people from completely ignoring my advice.
Let me talk about the two most common areas where people keep their cash besides just a
simple savings account and why I personally don’t recommend it. One common place is higher interest
CDs. Or certificate of deposit where you can get a higher interest rate compared to a simple savings
account. The reason I don’t recommend CDs is that most often these accounts have a time duration
that you need to keep your money in for in order to earn that higher interest.
If you take the money out before the CD Maturity date you have to pay a penalty.
And that penalty would effectively wipe out any interest gain you would have made,
plus more. You never know when you will need cash to help ride out the bumps of life.
Or when that new opportunity may make itself available. A second common area that I’ve seen
people keep their cash in is in a Roth IRA. And this is because contributions to a Roth
IRA can be withdrawn at any time without tax and without penalty. However, most often your Roth
IRA is invested in the market and you never know where the market will be when you need that money.
If you happen to lose your job, it could also be likely that the market also tanked. You'd not only
need to deal with the job loss, but take a loss in the market because you are needing to pull
that cash out to cover your basic expenses. Or the flip side. What if you are taking that money out
when the market is doing extremely well and you are missing out on the gains. Keep things simple.
Define a single goal for each dollar. Your Investments job is to stay in the market and grow.
Your cash’s job is to give you that cushion when life happens. Keep them separate. Alright,
with that said back to another key reason why cash is king. The third reason is that cash gives
us peace. Emotional health is crucial to overall physical health. The Dalai Lama, when asked what
surprised him most about humanity, answered: "Man! Because he sacrifices his health in order to make
money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future
that he does not enjoy the present.” - Dalai Lama If we don't have our health, what's the point of
having tons of money? We won't be able to enjoy it. So by having a financial “cushion,” whenever
unexpected events happen, we can calmly respond with “oh well, that sucks,” rather than “oh my
goodness! What are we going to do!?” My aging parents have lived with me for close to 10 years.
They have played a crucial role in helping to raise our children and I am forever grateful
for their presence. However, I am also constantly bracing myself for the day that one of my parents
will become severely sick or incapacitated to a point where they will need more hands on caring.
I hope that it never does, but statistics seem to be against me. I can never predict when and how,
but I know that it will come one day. My cash cushion helps me to find some level of peace.
Because if the worst comes to worst, and either my wife or I had to cut back our earnings to be
more available at home, it wouldn’t be easy, but I know we can weather that storm together.
The fourth reason why cash is king is that cash keeps you out of debt. Debt is one of the most
common financial struggles that people face. And therefore, it is one of the biggest sources
of stress in many people’s lives. According to BankRate, the average American consumer debt is
up to $93,000 thousand dollars. 75% of Americans carry credit balance from month to month. Nearly a
quarter of U.S. adults have personal loans against their names. And 12 percent of adults in the US
have a HELOC (Home Equity Lines Of Credit) with an average debt of $42,000 thousand dollars. Clearly,
debt is a big problem for a lot of people. And the reason is because too many of us have accepted
debt as a normal way of life. Gone are the days where we would only spend the cash that we have
in our wallet. With the advent of financial tools like credit cards and easily accessible loans,
too many Americans are barely surviving month to month. From one debt to another. But when we have
enough cash in our bank account, not only do we have the actual cash to pay for things. We become
a lot more conscious of our spending. We see real cash. Not just a credit card that we can charge
our expenses on. And we become emotionally tied to that cash. I have seen it with my own behavior.
When I get used to having enough cash in the bank account, I get wary about spending it down. I have
an emotional connection to it and it hurts me when I see it dwindle due to my frivolous spending.
Debt is one of the most dangerous things that can happen to our financial health. It is like a slow
poison that chips away at our wealth and mental well being. But when we have cash, we can avoid
it altogether. And that is why cash is king.​ Cash gives us options, choices and power over our
finances. The fifth key reason why cash is king is that cash gives you time. Time to think. And this
for me is one of the greatest benefits of having enough cash. It gives me mental and emotional
room to think. We don’t like to believe it, but we make rash decisions when we are desperate.
Do you know what the recommended protocol for trying to help someone that is drowning
is? It is not to jump in the water to help him or her. What is recommended is that we should try to
reach the person with something rigid like a pole. Not our arm. Or throw him or her a rope
and encourage them to grab on. And the reason for this recommendation is that drowning individuals
are probably the most dangerous persons to try to rescue. In a panic, drowning individuals
are likely to claw at rescuers and climb to the surface at all costs. And like a drowning person,
when we are in a financially vulnerable and desperate position, we can’t think straight.
Thus the perpetual downward spiral of bad decisions that can put us in a worse and worse
financial situation. When you have enough money in the bank account to weather through a year
of unemployment or market downturn, you have the time. Time to think. Time to plot your next move.
And time to make your best financial decision. Don't see cash sitting in your bank account as
just losing value. See it as more than that. Your bodyguard, fitness trainer and a thought partner.
If you are having trouble saving this cash and would like to learn a guaranteed way to save more,
please check out my video here. Thank you guys for watching and until next time, all the best.