I'm not actually here to debate whether the idiom "cash is king" is true or not, because it depends on the context. Sure, it's a good sign to see a business with healthy cash on hand. On the flip side, we live in a world where you can buy your weekly groceries by double clicking a button and holding your phone up to a machine - technology has come a long way! [insert rant about how kids these days will never know about T-9 texting]
The real meat of the discussion I want to tackle here is howmuchcash is king.How much cash do I really need?Here comes the classic financial advisor answer, "it depends."
If you think of your finances in three buckets, cash plays a starring role in Bucket 1 a supporting role in Bucket 2, and really no role in Bucket 3.
Bucket 1: Emergency Fund
Bucket 2:Intermediate Term-Goals
Bucket 3:Long-Term Goals
Bucket 1: Emergency Fund
This is where cash could be considered royalty, but a caveat: consider ahigh-yield savings account. How much should you keep for your safety net? We could get into all sorts of unique circumstances, but for the purposes of simplicity, let's define three main groups
1. Dual Income Household:3-6 monthsof your living expenses. If you were to lose your job tomorrow, in theory, one partner could support the income needs of the household while the other partner searches for a new job. For that reason, you can keep a lower amount in cash than someone that relies on only one income to support the household.
Here's a handy calculator to calculate a 6-month emergency fund
2. Single Income Household or Fluctuating Income:6-12 monthsof your living expenses. If this is you, think about building up additional cash beyond 6 months. You can use the above calculator to get to a 6 month target and build up beyond that.
3. Retired Individual:12-24 monthsof your living expenses. At this stage of life, you aren't getting a paycheck directly deposited into your account once or twice a month. Your income is coming from a fluctuating pool of assets, so to avoid dipping into those assets at the wrong time, you should build up a bigger cash buffer.
NOTE:Don't make the common mistake of carrying too much cash and letting inflation eat away at your purchasing power when you could be putting that money to work for you. Identify what your safety-net looks like, meet that goal number, and replenish as needed.
Bucket 2: Intermediate Term-Goals
Saving for a car? Trying to buy a house? Planning an awesome vacation next year? (Vacationers, please send me your itinerary for inspiration and I'll give you a summer Banff itinerary in exchange!) If you're knocking out of one of these goals in the next year, cash or your high-yield savings account might be your best option. Beyond one year, C.D.'s, treasuries or even bonds can be great options for these goals. In this bucket there's big emphasis on the "i" word...inflation. Consider those other options to have a better chance at keeping pace with inflation if you don't need immediate access to the money.
Bucket 3: Long Term-Goals
Cash really doesn't have a place when it comes to your long-term goals, which for most, are largely oriented towards growth. It helps to get clear on what your long-term goals truly are and then you will know that when you put your hard-earned money towards these goals, it's serving an intentional purpose.
If after reading this you are thinking you might be holding on to too much cash, ask yourself this:
Is this money serving the current me or would I be off better to repurpose this cash to serve the future me?
Cash is king when you prioritize it to serve both the current you AND the future you.