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5 Reasons for Having a Large Sum of Cash

2013 March 18

charlie_imageRecently, while I was reading over J$’s monthly updates on his net worth I noticed a category for a large cash hoard, which he calls “Monster Cash.” As any typical man, my jealousy immediately spiked, and I said to myself, “I want a large sum of cash too!:) (sounds like my kids do when one gets something and the other doesn’t.)

In all seriousness it’s really got me thinking…it sure would be nice to have this security blanket….this option…this opportunity. As the sole bread winner for our family of five it really appealed to me. I struggle from time to time with worry (insecurity) of being without work to provide for my family. In thinking of J$’s large cash hoard I thought there are a lot of benefits. Here are five reasons I came up with for having a large sum of cash. 



Security

As shaky as the economy has felt since 2008 it constantly fWarren.Buffetteels  like everyone’s job is being looked at. “Is it needed or not“? For myself, I often struggle with the fear of being laid off, and having this “security blanket” of cash would help with that insecurity. It also provides my family with additional security if I were to suddenly pass away (heaven forbid), which would help supplement my life insurance policy. All in all, the large sum of cash will help provide a buffer against any unforeseen events (granted they aren’t unforeseen to our Heavenly Father).

Investment Opportunities

When I think of a large sum of cash I immediately think of the Oracle of Omaha, Warren Buffett. Berkshire Hathaway,  is constantly sitting on a large sum of cash ($49 billion as of June 2011)  looking for excellent companies that they can buy out. With this cash they are able to be in a better position when hard times come and gobble them up for pennies on the dollar. Is your investment philosophy similar? Are you saving up cash in search of the right opportunity? Personally, I always hate the feeling I have when I’m presented with a good business opportunity, and can’t pull the trigger, because I don’t have the cash. Every good portfolio starts with a large sum of cash!

Opportunities to Take Greater Risks

Have you ever heard of the phrase, “The rich keep getting richer“? A big reason the rich keep getting richer is because their cash reserves give them opportunities to take greater risks. Take for example the show, “Shark Tank”. Tons of inventors are coming to wealthy venture capitalists to pitch an idea that they hope to sell. The sharks are the ones with all the money. They hold all the cards, and are able to take the risks because of their cash position. For me, one of the greatest sharks that comes to mind is Mr. Potter (richest man in Bedford Falls) in the 1946 movie, It’s a Wonderful Life. When everyone was making runs on the bank, Mr. Potter, was patiently waiting. Offering 50 cents on the dollar for everyone’s bank account. Start building your large cash sum, and you just might have the opportunity to take a few more risks.

Saving Money on Interest Debt or Credit Card

I hate debt! I hate it so much that I make it a priority to have an emergency fund to weather bad financial storms. Using a large sum of cash to avoid debt is very noble. It fits in line with my avoidance of being a slave to any lender. When my dad went through bankruptcy in 2008, I had the revelation that “No one can foreclose on you if you owe no one nothing.” As simple that truth may seem to many people it’s something we often forget. Signing up for debt is agreement to be a slave. In bondage until payment is received in full. Use your large sum of cash to avoid debt, and save tons of money on interest charges!

Survive a Layoff

I write an awful lot about preparing for a layoff, and contingency plans if you are ever laid off. I don’t know if it’s my own insecurity or what, but this topic is one I feel very passionate about. To battle this I actively do three things. First, I work on developing my multiple streams of income. If you’re every out of work, then this extra income with help out more then you’d ever know. Secondly, I’m constantly looking at ways of reducing my fixed expenses (dead weight). Finally, I actively work every paycheck to build up our family’s cash reserves. These cash reserves all play into answer the question, “How long can I survive being laid off?” Previously, financial planners and TV hosts were recommending 3-6 months in reserves, but with the condition of the economy many people have shifted to as much as 12 months. Do you know how long your cash reserves could last you?

Well, TTG readers, these are just a few of my ideas. I’d love to hear why you have a large cash reserve or want too? What is your reason?

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Charlie

An IT professional, Charlie also buys and sells liens, lives on the cheap, runs marathons and helps to run his family farm. In his spare moments, he raises 3 children, does the dishes and writes one post a week. His former blog, Frugal Retirement Plan, has been cited by US News and World Report.

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11 Responses
  1. Steph permalink
    March 18, 2013

    Let me first preface this with-I am risk adverse with my money-we have over a years worth of cash on hand because of my insecurity about money.

    That being said, financially speaking, most people say that you want an emergency fund in cash to cover expenditures for 6 month ( I believe that some increased it to 9 or more based on the economy and increase in uncertainty with job security). However, more than that while you may feel more secure your actually probably losing money ( not earning money you could). The interest rate of cash in hand is 0- 1 percent maybe in a saving account. You would likely earn more by investing the money in stocks or bonds (for tax deferred investment vehicles-401k).

    I think it is important to be respectful and aware of the potential financial uncertainty, but at the same time you have to balance that fear with the reality that you are paying, by money not earned, for the increased certainty.

  2. March 18, 2013

    Good post Charlie! We have a pretty nice cash pile ourselves, though not as big as J$. We have it for a number of different reasons. We have quite a bit on the side in our IRA’s to be able to take advantage of some investing opportunities. We also have one that sits there as we run our own business, which helps us sleep better at nights plus take advantage of opportunities that might arise.

  3. March 18, 2013

    You know what makes it easier having that much cash saved up? A wife who forces you too :) I’d have a lot less if she were as risky as I, haha… though not sure that’s entirely a good thing?

  4. March 18, 2013

    @Steph – balancing risk vs reward is what it really comes down to. For some people having 100% of there money in stocks and bonds is some people risk tolerance. Not me. I understand that I may be losing money in the short term, but long term I know I’ll win out. Take Warren Buffett as the example…he hoards cash to be able to swoop in and get good investments at discounted prices. Now I doubt he’s losing any sleep earning 0-1% on his cash immediately, but he’s looking more so at the bigger long term gains from buying low. Ultimately like you hinted in your comment – we all have an illusion that money creates safety.

    @John – “take advantage of opportunities that might arise.” – I’d call you the second coming of the Oracle of Omaha! :) Fitting since you live in Omaha! :)

    @J$ – as I always say…behind every good man is a better woman! Hang onto that one.

  5. March 19, 2013

    I would love a giant stack of cash but I am concentrating on debt elimination. I do have enough cash to pay for a new car windshield and a flat tire and an emergency vet bill because things like that seem to happen all the time.

    Big stacks of cash are part of my future plan. I would like to have a 1 year emergency fund in cashable GICs (guaranteed investment certificates). Cash helps you sleep well at night and not put up with so much crap at work.

  6. Dona Collins permalink
    March 19, 2013

    One of the hardest things for me to do was create a savings account while paying off debt at the same time. I wanted to put everything I had into my debt, but I was always terrified of the next car breakdown or potential emergency. Allowing that small sum to build up over time really did help. And eventually it will be a large sum of money I can be proud of!

  7. JMK permalink
    March 23, 2013

    We used to have a stash/emergency fund built up but we realized there was no scenario where we’d actually need it, so we rolled it all into our retirement savings and paid down another chunk of the mortgage. We now keep a minimum balance of $1k in our checking account which means no fees, and we have that cash quickly available if needed (although we haven’t needed it in the 7 years we’ve had it there).

    We have only our mortgage left and if we do nothing extra it will be paid off in 5yrs. We have saved enough now for retirement at 65, which is 16 yrs away for me and 13 for him. A layoff several years ago caused us to panic at first and quickly reevaluate our spending and cut to the basics. Up to then we were living within our means but had no real idea how much we were wasting on nonsense. That layoff was the best thing that ever happened to us. We cut all the nonessentials and discovered that the bare bones essentials only required about 55% of our take home pay. The job was quickly replaced but we never went back to our old spending. Once we realized how much “excess” income we really had, and had been wasting we decided to use it for something really important to us. That’s when we decided early retirement, while still taking a major trip with the kids every year were the ONLY two priorities and any nonessential spending was done. We are working toward paying off the mortgage in 3yrs not 5, and building up enough extra funds to retire at 57/60 and carry us through the years until 65.

    Since our incomes are split about 45/55% we know that if the lower salary is laid off, the higher salary can cover the essentials indefinitely. Any unemployment benefits received is just gravy. If the higher income is lost, the lower income plus the unemployment benefits will cover the basics. Any severance paid in either case would be a complete bonus. We both have extensive life and disability insurance to cover those scenarios. So we think in our situation that a pile of cash just isn’t required. Any everyday “emergency” that wasn’t on our spending plan can be covered by the excess. Every week a paycheck is deposited and depending on the week, half of it isn’t required for anything. If there was no emergency, then the excess gets transferred out to boost our early retirement savings, make an extra mortgage payment, or pay for an upcoming trip. The next week the same thing happens again with the other person’s check is deposited. In the case of a layoff, we’d simply stop the extra retirement savings and mortgage payments and delay or skip the trip. Worse case we just pay off the mortgage in 5 years instead of 3, we retire at 65 instead of 57/60, and we don’t get to travel until retirement. In other words, worst case we do what most other people are aiming for.

    Living WAY below our income is our alternative to needing a big pile of cash sitting around waiting for disaster to strike. If you desperately need every cent of your income(s) to cover your expenses then a stash makes sense. When you are essentially living on one income you can easily adjust to losing the other without it being a crisis.

    We’ve been through four layoffs over the years and all turned out to be more annoying and inconvenient than anything. Job hunting isn’t fun, but it’s certainly less stressful when you can afford to be choosey because you aren’t being pressured to take anything you’re offered just because you have bills piling up.

  8. jim permalink
    March 25, 2013

    JMK,
    I’m curious – if you wouldn’t mind sharing – just how much $ do you have saved up that makes you feel you’re ready for retirement at 65 years old – 13-16 years in the future? I just never feel like we haven anywhere close to sufficient retirement funds. Thx.

  9. March 28, 2013

    Great article! I would like to just add though that the accumulation of a sizable chunk of cash is only a good idea if debt free. I wouldnt advise anyone who is still buried under debts to try an build a large cash savings amount. A small emergency fund maybe but defenitely the biggest priority needs to be on debt repayment (mortgage included)

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