Why Liquidity Is Never Overrated. Cash is King.
By: Mia Gradelski
Tags: Stock Market, Wealth, Rich, Business, Finance

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If we’ve learned anything during this pandemic, it’s not the new spin on the banana bread recipes or how to build a fort, it is why you must be prepared for the worst and hope for the best. The rule of thumb when it comes to emergencies is to always have allocated money, most commonly 6–12 months of cash (liquid) to stash into an emergency savings fund. This money cannot be used for discretionary items or daily purchases, only emergencies that are unexpected but eventually predicted. The younger and less experienced we are, the more naive we are to believe cash is there to keep us afloat.

And it is understandable. Cash not only loses its value over time due to inflation but doesn’t grow that much in a savings account, CD, or treasury bond. About .01% to be exact. So your only option for quick cash compared to physical cash is from the stock market but that leads to even more problems we will discuss.

Especially Millenials or early GenZers who believe in the rich quick schemes and gamble with each other to see who has the most money, fall into the trap of having too little cash when a pandemic, flat tire, or pipe breaks in your apartment. It is fascinating to read that compared to men, women not only make higher returns in their portfolio with more cash, but they also save more, consult with a financial advisor, have less debt, and are in better situations during economic downturns. I’m proposing that this is due to the case that we are more risk-averse (more cash-heavy) despite living longer which doesn’t really make sense since more time = less risk you can take. But as women, we don’t treat money as a game and know it is necessary to be prepared. For sure there are men that are responsible with money and believe in cash, but when it comes to the majority of them, women can sniff a problem a mile away.

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As a result, I recommend 5–10% of your net income in cash and 2 years worth of it, not 6 months because that is not only too little time to find a job and fix life problems, it is not realistic for the economy to recover in that short amount of time.

Perspective Problem

What is certain is uncertainty and as animals, there is nothing more than we hate than change. The worst stance to take as a money manager is to be too optimistic. Yes, over time all of the indexes go up but we cannot fast forward in time. We must ride the waves or the volatility, whether we like it or not. The worst decision to make is not to invest in all.

Assuming that nothing bad might happen eventually is like standing up as a passenger sticking your head up in the sunroof while driving. It can be done but there are serious risks if you brake suddenly or go on the highway. Being too optimistic means that you aren’t weighing your options and as a result, not aware and careless. Instead, turn your attitude to being cautiously optimistic, as I like to call it realistically pessimistic. Being cautious about realistic about the future will allow you to not only be in a better spot financially but mentally and emotionally as well becuase money can trigger a high amount of volatility when it comes to our well being that can all be prevented by putting cash aside.

Cash’s Promise

But doesn’t cash put you in a worse financial situation? How does it make me more secure? Since cash is the best form of liquidity, there is no hassle or extra work needed to convert it into liquid form without losing money against the market price, and allows you to use it immediately, not waiting a few days to sell your other investments.

Liquidity is vital in any situation, whether you are a company or individual looking to pay off short term liabilities, debt or in the pandemic’s case, have money saved up in case of an emergency, it only hurts not to have it. My recommendation is to have 5–10% of your net worth in assets, regardless of your financial situation, except if you are the richest man on Earth and savings most likely isn’t necessary in your case but even in that situation, if a competitor comes around and all your assets are allocated into Amazon stock, beware! No less than 5% or more than 10% because those scenarios will hurt your chances of growing and sustaining wealth. With less you are getting risky needing to tap into your 401k, ROTH IRA or 529C dedicated accounts that are helping you build your growth and with too much, you are losing money.

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The smartest personal finance consumer believes cash is really king. So let’s first discuss the misconceptions from the riskiest and ironically poorest people about why so much cash isn’t needed:

Can always sell investments for cash

On a snowy night when you get into a car accident driving home from a party or quickly need cash to pay for an unexpected medical expense (the #1 reason people go into debt), the last thing you want to think about is how will I be able to afford it? Cash not only is there always sitting, depreciating but still there for you to use, it is a lifeline.

People don’t pay attention to the smartest ways to sell your stocks, usually only how to buy them. Since only 40% of the population can afford an out-of-pocket $1k charge and 60% are invested in the stock market, these individuals, in particular, shouldn’t be focused on their Tesla gains, if they cannot pay a basic expense or get into trouble. There are many different ways to sell your stock if you decide it isn’t performing the way you intended it on doing and in that case you would either issue a market, limit or stop order or work with a financial advisor, which typically executes within 24 hours. Depending on the timing of the incident and how fast you need to supply the cash, that might be too late and of course, the dreaded fees of selling investments come with that as well. Remember, you cannot plan to sell your investments at a low when an emergency comes. You only pay taxes on a high and gains always happen over time. Online broker fees range from $5 to $15 a trade or 1–2% of the value of your account. That surely adds up more than the value of cash.

Contact a friend, neighbor, family member, colleague, etc. for help

Connections are everything in this world. Most of the time, if you want a job, you have better luck meeting an employee at a brunch networking event, getting to know them and check-in every few months, bring them a holiday gift to show your thinking about them and before you know it, eventually help you cut through corners to land you a job.

Rapport is looked upon 10x more highly than any boring resume because a piece of paper can only say so much about a person. It is hard to differentiate if someone is lying and what they are like. Being personable and relatable in a team is more important than your IQ.

But at the same time people can be nice, but that doesn’t’ mean they will help you with your financial situation. If there is a crisis, they are most likely struggling as well. How many times did your friend tell you they would pay you back and never did? After a while, you not only stop hanging out with them, you never get your money back! And don’t assume this is just for people on a budget. The more money you have, the better chance you’ve worked hard for it and know how to manage it more than someone who has less. As a result, they will even be less willing because they know this tricky game of lending. As a result, no one will be able to help you. Never rely on others because with our finances instead just for moral support. We all are fending for ourselves these days!

If I don’t have cash, I’ll just cut back on spending

Plausible point but after you’ve eliminated those subscription services, eating Ramen 3x a day, sold all your stuff in your home, what is the point of life? There is a trade-off to everything. Cash doesn’t grow as much but is a cushion to a better life than struggling and realizing that without it it is more miserable. You could have more money invested growing the stock market but if you don’t want to sell your gains when you need cash, then you lost more than if you had proportionately allocated it.

Cash + diversified portfolio > Just a diversified portfolio all in the market

Plus for how long can you go back to your childhood home and live with your parents? It doesn’t matter what people think, it’s not that embarrassing you do you but it’s just a hassle when you need to commute and a quiet space for WFH. Don’t you want to move out of there eventually with just a little more cash? Make your life easier by stop focusing on the returns that will not feel like rewards without a cushion.

Can take advantage of unemployment claims & severance

Something that most people do not understand. You cannot file for unemployment when you either get fired or quit only on a severance, which is compensation and or benefits that an employer provides to an employee once you are laid off. It never hurts to ask for a severance package but the fact that you have to rely on your previous employer to support yourself, is not only awkward and embarrassing on your part, but scary. Depending on how well you are with negotiating and all this business hassle in between, you might not even get a whole lot. You are done with working there and this is just a package to say good job for your time here now leave. When cash is always available, you don’t need to scramble to ask your employer or quit just for extra money. You are independent on your own. The milestones of achieving financial independence.

Side Hustles

With the power of the internet, you can easily pick up a side hustle that can make be considered a lucrative passive income stream. But crucial to remember that most forget: That doesn’t come right away. If you are evicted tomorrow, it is rare you can rake up $1500(typical rent in NYC) by tomorrow just driving Uber unless some party was poppin that night. It is also difficult to sustain yourself handling multiple side hustles all at once. You cannot even afford an assistant at that time. It takes time to build up customers, get a license, get situated with the job, and finally find some good traction which usually takes weeks let alone months or years as with this blog. If I just decided to start a blog intending to make thousands in the first few days or weeks, that wouldn’t have been possible. Passive income takes a lot of time and dedication upfront for no guaranteed reward that someone on the brink of homeless doesn’t have the patience or stamina for when trying to just survive not deal with dropshipping and watching YouTube videos on motivation. That is the last thing you want to focus on.

The most common reasons outlined above on why cash isn’t necessary are the typical answers young investors will tell you who don’t believe accidents happen despite taking the most risks. When you are young, we have more adrenaline and love the thrill of adventure but when it comes to dealing with your money, that is a red flag you need to get caught up on speed with what personal finance involves. It not only is personal so you can never rely on what others are doing that is working for them, but also it is all about achieving your goals long term.

Just like with your career, if you keep starting and stopping new paths, nothing will get accomplished. Stick with one thing because over time and with diligence and patience, you will achieve something, big or small. In history, the market has always been a bullish (on the upside) only a bear and bull combined come through during each of the 253 trading days of the year.