There seems to be a movement going on that believes cash is king. How many times have you heard that exclaimed lately? Well I’m here to say it’s not and cash will definitely never be my king. In fact, I believe in democracy so there really is no king to me but that’s a whole other story. To me cash is fruit. Think about it…
What’s your favorite fruit?
People love clementines. There sweet, juicy and easy to peel. The great thing about clementines is you buy them by the crate. You get your little wooden crate of clementines. I usually can’t wait to get home to eat some. They’re pretty small and I’ll tend to eat two or three at a time. Clementines give you a sweet, sugary, juicy flavor that makes your taste buds go nuts.
This is how cash is for people. Their sense go nuts having cash on them. It’s a lot like a sugar high. They feel good with the cash in hand. The switch gets flipped to money to spend when you have cash in hand. I feel like a steak and cheese sub today. Oh look I have cash, let’s go. I want some clementines. Cash in hand, clementines in the bag.
The funny thing about clementines is you get a bunch of them in that little crate. My problem is I never finish them all. There is always a few left in the crate when it happens. You know what it is. You go to grab one and it doesn’t quite feel right. Maybe it’s just one spot at first, then before you know it the whole clementine is feeling a bit squishy. Then the discoloration sets in. Your clementines are rotting.
Cash does the same thing. Maybe you don’t have all your cash in your hand but instead you are stock piling it in your bank account. Well you know what’s going to happen to that cash over time. It’s going to start to rot. Money is a commodity. Cash today will not be worth as much as cash tomorrow. Prices will rise, purchasing power will decrease.
The first principle of the Evolution Of Wealth is the power of LUC (liquidity, use and control). This might be the closest thing I have to a king. Cash is important. Just as it is important to have cash it is just as important to not have too much cash. By using the power of LUC, you will be able to get the features of cash without the downside.
- Yes, you need cash on hand and readily available to you for an emergency. This amount is different for everyone depending on their situation.
- Cash is great for liquidity and control but it doesn’t have very much use. It just sits there and rots.
- If you have liquidity elsewhere you can meet quick emergencies and then get your hands on a lot more money in a short period of time (a day or two).
- By focusing on LUC, you will be able to get a whole lot more use out of your money. Whether it be to combat inflation, provide protection or just get a rate of return.
- Without use, your opportunity costs will begin to pile up. In fact, you might create compounding opportunity costs.
I understand that people are not responsible. I get that. To me, that is the driving force behind the likes of Suze Orman changing her tone. She talks to the masses, to the average people. To them, the bigger problem than cash is debt. If your problem is debt then by all means go to cash, if that’s what it takes to fix your problem. However, if you are responsible with your debt, then cash is NOT your king. In fact, at a certain point it is just drag or friction that is slowing you down.
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{ 13 comments… read them below or add one }
For me, cash is more like a clementine. Aside from having my emergency fund, I have a little too much cash and I don’t know what to do with it. I don’t have too much money, just cash. I can use it to pay down more of my student loans, but then I’ll lose the flexibility of having cash later. Or I can invest, but that’s risky and then I won’t have the money in 6-8 months when I want it. I hate the idea of having money just sitting there earning 1.3% while some of my loans accrue 3.25% interest. Should I just pay it off?
.-= Daniel´s last blog ..Are You Moral? =-.
@Daniel
I have to say I don’t usually advise paying off low rate loans such as student loans because of the flexibility having money on hand can provide. It sounds to me like you want to maintain the liquidity of cash but get a little more use out of it?
Basically I’d like to have the best of both worlds. Having 75% of my savings in a low-interest savings accounts just doesn’t feel right. But I guess as I grow and age, that will change drastically. Kind of want to jump ahead a few years…
.-= Daniel´s last blog ..December Month In Review =-.
Too many clementines rot over time. Businesses never have too much cash on hand, unless it’s ear-marked for an upcoming project. And basic accounting teach business owners to take everything on credit and pay just before interest is due. What individuals lack is self-control – like that box of juicy delights.
@Aaron
I definitely agree with you about the self-control. Could it be that people become more emotional in their personal lives? I’m a sucker for clementines myself.
Gotta say, I LOVE my cash, and specifically the cash in my “Freedom Fund” on my site which is locked away in longer term yielding instruments.
Can’t have too many clementines for me! It’s all about “going broke to win big”. Lock the money away, and you’ll wake up in 10 years and have a boatload.
It’s the same thing with the 401K. I promise you, we’ll all have at least $200,000 in 10 years, even after horrific declines!
.-= Financial Samurai´s last blog ..Everything Is Rational – The Answer To All Things Irrational =-.
@FS
What happens if you wake up in 10 years open up your lock box to find a bunch of rotten clementines?
We’re all wondering what ‘long term yielding instruments’ you are using?
Then nothing else will matter, b/c everything else will have gone to shit, and we can just be happy with out friends, family, and health!
5 yr CDs…. The DVD method of CD investing.
.-= Financial Samurai´s last blog ..An Ambulance Screams By, Do You Feel Happy Or Sad? =-.
Sam, your site is really slick on an iThing BTW. But I don’t think money in your Freedom Fund would normally be considered cash or cash equivilent unless you hide it under your mattress.
Hi Aaron, what’s an iThing? Too much use of the word “I”?
Okay, it’s really an iPod Touch, but it sounds silly saying I was on the internet (sleepless, no less) on an iPod. I think of it as an iPhone without the phone part attached to it.
But now that I see you have laddered CD’s, maybe I’d take back my comment about cash (because surrender penalties never exceed the interest), but perhaps 5 years isn’t a long time horizon.
I like how you keep it interesting. I added you to my “interesting” list.
Ahhhhhhhhhh, OK, thanks man. Yeah, there’s this cool plug in to make my site look consise on an iPhone, iTouch etc, I forget what it’s called. Glad it works for you.
There’s no ladder in my CD strategy actually. Not sure if you read “The DVD Method To CD Investing, but here it is. Love to hear your thoughts.
.-= Financial Samurai´s last blog ..An Ambulance Screams By, Do You Feel Happy Or Sad? =-.
@FS
Some of us might be interested in what that plug in is…I wouldn’t mind if my site looked good on an iThing. That’s only if you don’t mind me copying you. Of course, imitation is the greatest for of flattery.
Can I ask you a question about your CD investing…Do you net for tax purposes?
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