Remember the Wu Tang Clan song lyrics, “Cash rules everything around me, Cream get the money, dollar dollar bill y’all”? Cash is king, cash flow is king and flexibility is king. A lot of people built up their cash reserves during COVID and now are spending that saved up money (and pent up energy) in full force. Here are some reasons why I think cash is king, especially in these times of high interest rates, high inflation, and fears of recession.
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Table of Contents
What Does Cash is King mean?
First off, let us go over what the phrase Cash is King means. Cash is king is the emphasis on have lots of cash on hand and cash flow compared to other assets or other forms of capital.
In terms of a business, it means the company have liquid capital readily available to deploy for expenses like equipment or employees. In terms of cash for individuals, it means looking at income from various sources.
Income sources like investments like dividend income and capital gains, your paycheque income, your business income, your interest income, or even your side gig income. Widening the gap between the income sources and the expenses such as mortgage payments, debt payments, day to day living expenses provides you peace of mind, confidence, and flexibility.
Cash Flow is King
Cash flow is even more important than net worth in my opinion. Here’s why cash flow is king:
Cash Flow prepares you for emergencies
Having cash on hand allows you to pay for unexpected expenses, like $2000 to fix a leak in your car and clean the mould from your car’s interior. A sudden job loss can be another emergency example, if you lose your job and you need money to cover your expenses and have no emergency fund to access, the instinct is to resort to high interest debt. Here’s how much I think you should have in your emergency fund.
Cash Flow Gives you Dry Powder To Invest
People wonder why I had so much cash on hand when investing. Well, it gave me lots of ammunition when the stock market kept having circuit breakers with that black swan event we call COVID in 2020. I have much less cash on hand now, and I would like to build that up again.
Math shows that being “fully invested” works out better financially for your investment portfolio. However, we also know that psychology can trump math and humans are not robots. For me, having cash on hand makes me feel better when I see continuous red days.
Positive Cash Flow Is a Basic Building BLock for Financial Independence
If you want to be financially independent and to have a work optional life, you will need positive cash flow. When you save and invest the cash flow, you continue to build wealth. When your passive income (whether it be from capital gains or dividends) exceeds your monthly lifestyle expenses, you are financially independent.
The crossover point, a term coined by Your Money or Your Life’s Vicki Robin and Joe Dominguez is when your passive income exceeds your monthly expenses. It is when your monthly expenses and your investment income meet (or cross) and intersect, then the income from your investment capital becomes higher than your monthly expenses.
In essence, cash gives you peace of mind. Some people balk at having a large cash reserve and not being fully invested and ‘wasting that potential’. A lot of things in personal finance doesn’t always make sense. Personal finance is personal, and what works for you won’t work for someone else. Everyone has a different risk tolerance.
Basically, if you are an investor who experienced the 2020 market crash (or even the 2009 market crash), put yourself back in 2020 when the market was crashing and the circuit breakers were firing. If you were fully invested, how did you feel? If you had cash on hand to invest, how did you feel?
Cash is King during a Recession (and any other time)
Finally, cash is also king during a recession, and arguably at any other time.
What is a recession? A recession is period of economic decline with at least two consecutive quarters of declining GDP (Gross Domestic Product).
During recessions people lose their job. If you lose your job you may have difficulty paying your bills without a cash buffer or emergency fund.
Recessions usually come with deflation but we are currently experiencing record inflation. Governments try to tackle this by increasing interest rates (meaning higher cost to borrow but it also means higher rates for savers).
Recessions usually also come with market downturns. When you have cash on hand in your investment portfolio, you will be able to capitalize on this and scoop up distressed income producing assets.
How to Build Up Your Cash Flow
Now that we understand why cash is so important, here’s how to build up your cash reserves and cash flow. It’s a basic principle of not spending more than you have coming in and squirrelling away that difference to invest or save.
Check Your Budget
I’m not really a budgeter, but you do have do to an analysis of what your income is and what your expenses are. I like to track my spending and add it all up at the end of the year. If your expenses exceed your income you have a cash flow problem.
I noticed that Ramit Sethi was doing this in the How to Get Rich Netflix show, where he looked at the chequing accounts to see the inflow and outflow of cash.
Look At Where You can Cut Expenses
To improve your cash flow you have to control your expenses. What is necessary? What can you do without? What can you cut to save money? What expenses bring your life so much joy and enrichment that you don’t want to cut out?
Increase Your Income
Another way to widen the cash flow is to increase your income. According to Bankrate, 39% of U.S. adults have a side hustle.
The average amount per month of side hustle money in the US is $810 per month.
That’s not chump change!
Increasing income an be done by adding passive income as well. REITs, dividend investing, high interest savings, are all ways to increase your passive income.
Prioritize an Emergency Fund
As mentioned earlier, building an emergency fund is important to be able weather the storm of a recession, job loss, and unexpected expenses.
Pay Off Debt
High interest debt can be a major drag. Even mortgage debt can be a major drag (especially if you were in a variable rate mortgage and was having to manage the ever increasing mortgage payments or if you recently hit your trigger point).
Focus on paying off high interest debt, student loans, and work on other debts to increase your cash flow. Even if your mortgage payment was at a 1.80% interest rate and only $2000 a month, after you pay off your mortgage, that’s $2000 a month of positive cash flow that you will have to invest, save, or even go on a trip once in a while.
Being debt free is a liberating feeling.
Cash Is King Recap
In summary, cash is king! Cash flow gives us psychological peace of mind knowing that there’s money coming in regularly for us to use to save, invest, or spend as we see fit. Even though mathematically it might not make sense to be fully invested, having some cash reserves helps one to not sell low and buy high because you have cash to buy assets on sale.
Even entrepreneurs who sell their start ups for $10 million feel the itch to develop another business to develop cash flow… even though they have $10 million in the bank.
Cash provides you the ability to achieve your long term financial goals and achieve financial freedom. It also provides you with a carrot and reward for your efforts (your work) which is something humans have trouble saying no to.
Do you think cash is king?
Do you prefer having cash flow or do you prefer having a reserve of cash on hand?
What percentage of your portfolio do you have in cash?
You may also be interested in:
- How to manage your money in Canada
- How does a savings account interest work?
- How to calculate your FIRE number
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.