Why Cash is King
During my net worth updates, one question that often comes along is why I hold so much cash. I believe the rationale behind the question is that under normal circumstances, cash could be put to work and grow instead of sitting in a “high” interest rate savings account that barely keeps up with inflation. I also believe in the rationale of putting cash to work, especially putting cash towards bad debt. However, I also believe in holding a stock pile of cash in case “something comes up”.
For as long as I can remember, I’ve been a saver. I recall being 8 or 9 years old with my own bank account and enjoying watching the numbers in my bank book (remember those?) increase. This behavior has continued throughout the years and now I get the same satisfaction from my net worth updates.
Back in my University days, I worked part time (sometimes full time hours) while participating in alternating academic and paid work terms. With some frugal discipline, I came out ahead with some cash in my bank account. I believe that the earlier that you start building cash savings, subsequent large purchases become more manageable, which reduces debt over the long term and ultimately starts a long term positive financial cycle. But even if you weren’t an early saver, the next best time is now. Here are some reasons why cash is king.
Cash Savings Gets you Ahead
In our case, cash savings from University allowed us to put a large down payment on our first house within a few months of graduation. This resulted in lower payments and less interest paid to the bank over the term of the mortgage. Combined with lower payments and renting out a portion of the home, it didn’t take long before our savings grew again.
A growing cash war chest gave us options. We could pay down the house to save even more interest, pay down consumer debt to increase our cash flow even further, or invest the proceeds in the stock/real estate market. What did we choose? We paid off a student loan followed by a car loan within a few years.
Within four years, we sold the two apartment to build a custom home for our growing family. As the positive financial cycle momentum kept building, it eventually lead to paying off our new home mortgage in three years.
Cash Savings Gives you Opportunity
As mentioned, our expenses were very low while living in our two apartment home. At the time, real estate was my focus so when there was an opportunity to purchase a relatively new home that was in great shape for a great price, I took advantage of it. My article on buying foreclosures in Canada explained how I purchased a rental property via bank sale. The catch was that in order to purchase a house from auction (in NL), the winning bidder needs to fork out a 10% down payment on the spot or within that business day. As we have a tendency to build our cash reserve, we had enough for 10% to close the deal quickly.
You may have noticed that I’m a bit of a deal seeker and as it turns out, I’m the same way when it comes to the investing as well. Having a bit of dry powder (ie. cash) sitting in the sidelines can allow an investor to quickly take advantage of buying opportunities without having to sell a position first.
Cash Savings Reduces Stress
It may depend on temperament, but for us, having cash in our bank accounts give us a sense of security. This comes back to the argument of emergency funds – should people hold cash or simply have a line of credit in case the worse happens. We’ve discovered that when we needed things like a new hot water boiler, or a new fridge for an apartment, going into debt would simply add to the situation. Simply put, we prefer to pay cash (although we use a credit card to collect the points first) and stay out of debt where possible.
What are your thoughts about cash? Do you try to keep a cash war chest? Or do you deploy cash whenever possible?