The statement ‘cash is king’ is commonly used in the business world to signify the importance of having resources in cash form that can be deployed immediately to meet financial needs. Without liquidity: the ability to meet financial obligations as they fall due, businesses collapse irrespective of their asset base and profitability status. Similarly, most financial difficulties at personal levels are due to inability to meet needs as they arise. This is why financial difficulties are common to both the rich and the poor.
The three economic principles; economic uncertainty is certain, economic cycles are normal and cycles cannot be predicted and economic prosperity is certain but only in retrospect are a constant reminder that we cannot predict the future but, economic upheavals will certainly come. Having a high net worth will not protect you from economic shocks if you do not have an appropriate share in liquid assets. Hence the need to create a margin or liquidity well in advance so you can ride the tide more calmly.
Building a margin or liquidity is part of building a solid foundation for your financial capital. You build a margin mainly in two ways:
- Spending less than you earn creating a surplus and keeping it in cash or in assets easily convertible into cash.
- Diversifying assets into income generating investments avoiding over concentration in non-productive assets such as land held for speculation purposes. However, this way only works if you spend less than you earn.
Keeping some money in liquid form might actually deny you higher investment returns but they enable you to deal with financial storms and upheavals as they come, keep you out of debt, protect your net worth and your peace of mind.
How much should you keep in liquid form?
The size of cash reserves, also known as an emergency fund varies depending on one’s financial obligations and circumstances. A guiding principle is to assume if you suddenly lose your source of income, how long it might take you to replace your income. The recommendation is that you maintain three to six months’ worth of living expenses if you are in stable employment and twelve months to twenty-four months’ worth of living expenses if venturing into business. The emergency fund will enable you maintain your standard of living such as live in the same house and keeping your children in same school as you find a job or launch a business. This will afford you peace of mind as you navigate the transition as well as protect your other assets from losses that might arise if you are forced to liquidate them in unfavorable times such as during or immediately after the COVID-19 pandemic.
Where do you keep the emergency fund?
Invest your emergency fund in a low risk liquid asset such as a money market fund that preserves capital and provide growth. There is a withdrawal process that gives you room to consider if indeed you need to access your savings limiting access to worthy causes only. The funds are accessible on demand and have them in your bank account within three to five days.
Meanwhile as you build your margin and your resources, remember that your trust for provision and all you need should be in God alone.
The scriptures have a lot to say regarding building a margin as per sample below.
- Proverbs 27:12 (ESV) The prudent sees danger and hides himself, but the simple go on and suffer for it.
- Luke 16:10 “One who is faithful in a very little is also faithful in much, and one who is dishonest in a very little is also dishonest in much.
- Proverbs 30:25 (CEB) Ants as creatures aren’t strong, but they store away their food in the summer.
- Mathew 25:14-30 (NLT) The Parable of the Talents
Verse 26-27 “But the master replied, ‘You wicked and lazy servant! If you knew I harvested crops I didn’t plant and gathered crops I didn’t cultivate, why didn’t you deposit my money in the bank? At least I could have gotten some interest on it.’
- Psalms 62:10 Put no trust in extortion; set no vain hopes on robbery; if riches increase, set not your heart on them.