Cash, Cash, and Near Cash

Cash is trash. Cash is king. Which of these two common statements are correct? What do they mean? What is cash? How much do we really need?

Holding cash is a liability in the current environment. Government policy guarantees that the cash you hold today will lose its value over time. Economists are pleased to call this phenomenon, inflation. Politicians call it, monetizing the debt. I call it theft. Cash (money) is a spiritual commodity. Gold, paper, or bitcoin, it only has value because buyer, seller, and holder all believe it has worth both as a medium for exchange and a store of value. To intentionally debase a currency is at best theft. At worst, it is sin.

There is nothing more fungible than cash. It can be transformed into a mutually accepted amount of just about anything. If you want to buy from the corner drug dealer, you better bring cash. When the bottom falls out of the market, those who have cash reserves can buy the future profits of great corporations for pennies on the dollar. Those who do not have cash, sell to those who do have cash at the very time when they should be buying everything in sight. Closer to the life of the average American, cash means that a flat tire or a trip to the dentist won’t result in a credit card bill that will hang around for 36 months at a 12% to 20% interest rate.

The most basic form of cash—is—cash, greenbacks, federal reserve notes, pieces of paper featuring the portraits of dead noteworthy (a joke) Americans. I think just about everyone should have at least $20.00 or so in their wallet and some change in their purse or pocket. Using plastic for fast food, vending machines, and things like football pools and office charity drives seems silly or downright impossible. Beyond what is called, “walkin’ around money,” I think it wise to have a few hundred dollars hidden in a drawer or a closet somewhere in the house, both as a convenient in-home ATM and for contingencies, like pizza delivery or a neighborhood handyman who works on a cash only basis.

The next form of cash, is found in checking accounts, money market funds, and the old fashioned FDIC insured savings account. Conventional wisdom dictates that a family should have 3 to 6 months’ worth of expenses in an emergency fund that can be tapped more or less immediately, but isn’t too easy to grab when handling “emergencies” like the afore mentioned pizza delivery man. Sometime following the crash of 2006-2008, Suze Orman bumped her recommendation to 8 months reserve, due to the dramatic increase in the length of time required to find a new job during what has come to be known as the Great Recession. To me, three months seems like a high priority goal. Six months is desirable, but reaching that goal can be discouraging for a young family when there are so many competing needs for money.

The use of a little common sense can help. If you have ten years of seniority in a government job, you might focus more on paying down your student loans and less on building your reserves past the six month level. If they just eliminated all overtime and shut down the night shift at your factory, you might want to buckle down on building that emergency fund and start filling out some job applications.

Retirement is a little different. Hopefully, your Social Security, and an inflation adjusted four percent per year draw from a lifetime of savings is providing you with a comfortable lifestyle. How much of that nest egg should be in cash? While there doesn’t seem to be any general agreement among the “experts,” I have seen the number, two years’ expenses in cash, bandied about. I think that sounds about right. Two years’ in cash or maybe something like 10% of your net worth sounds good to me. Remember, you are no longer receiving a regular paycheck. You don’t want to “need the market,” meaning you don’t want to be forced to sell when the market crashes. In fact, you want to be able to buy at the bottom. If you are retired and have investments, even a 401(k) that only offers a handful of mutual funds, you want to be able to shift your holdings to undervalued assets when the opportunity presents itself.

Finally, a word about “near cash” assets. These are investment vehicles like Certificates of Deposit, Treasury Notes, and bond funds, such as my Ginnie Maes that are “full faith and credit” guaranteed by you, the American tax payer. These assets go up and down—a little bit—with changes in the prevailing interest rates, but they are highly liquid, meaning they can be converted to cash in your money market fund in a day or less with only the possibility of minimal loss. It is very handy to have a goodly percentage of your net worth in such boring assets when facing a major stock market crash, something that happens every twelve years or so.