Save Cash Until You Are Slightly Uncomfortable
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I have a new personal cash management plan.
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It doesn't involve saving 3-6 months of expenses for an emergency fund.
Nor does it relate to a small cash buffer..
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Instead, it's more of a personal preference. But, I want to share it with you today because I think it can alleviate some of the stress people experience surrounding money.
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Our goal here is to reduce your stress and anxiety around money and empower you as Wealth Builders to grow your net worth.
I used to hear the phrase βcash is trashβ all the time.
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While that might hold for those with no risk profile who want to be in full growth mode at all times, for others seeking to mitigate risk, the idea of holding a small 3-month emergency fund might seem daunting.
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That's why I propose saving enough cash until you're slightly uncomfortable with how much cash you have.
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I first heard Morgan Housel discuss this on his podcast recently.
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It struck me as a fascinating way to think about cash.
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The standard 3-6 month emergency fund never seemed sufficient to me. That's why you'll always hear me say on The Personal Finance Podcast to work your way up to 6 months of expenses in your emergency fund. If you're self-employed or approaching retirement, you should have even more.
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And while this is true and I believe it should be your baseline, why stop there?
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Logically, if you are in growth mode, you should stop there until you can build up your investment portfolio for financial freedom. I want to make this clear: if you are not investing a portion of your income that is 20% or more (of gross), you need to reach that goal first.
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Otherwise, you could be working for a very long time. Thatβs the last thing I want for you.
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But, once that portfolio begins to grow and you are hitting your goals, I like to start adding to my cash. Stack that cash to the ceiling, baby.
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This is much easier to discuss when interest rates are at 5% on high-yield savings accounts. Yet, I firmly believe in mastering your cash position.
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Cash is freedom. It allows you to have security. It is your financial warmth in a cold and rainy world. Money is a tool to help you sleep better at night.
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With a wife, kids, and employees in businesses that depend on me, the last thing I want to do is overleverage myself.
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So, I am now saving enough cash until I am slightly uncomfortable.
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To be honest, I believe I know where I will land, but as always with money, I struggle with getting the goalpost to stop moving.
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Recognizing this about myself, I have had to make sure this isnβt me just trying to master some weird game in my head. So, I created rules.
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Every three months of expenses saved, stop and assess where you are. As you approach the time when you may retire (I donβt know if I ever will), ensure you have a few years of cash built up. Funnel cash outside of 6 months of expenses into guaranteed interest rate vehicles like T-Bills, Bonds, C.D.s, etc. This way, if interest rates change, they wonβt impact my locked-in rate. You can always invest a lump sum if you save too much, so worry less about the opportunity cost and more about building security.
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The first time I did this, I felt I had too much cash and bought a business with the excess. So, this can also be a forced savings exercise for bigger wealth goals.
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As always, remember: You must invest your money in assets to retire. You must save cash to have financial security.
You can do both and still become very wealthy. It all comes down to running the numbers and having a solid plan.
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