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Cash is a Wonderful Asset; The Case for an Emergency Fund; Free Yourself Thumbnail

Cash is a Wonderful Asset; The Case for an Emergency Fund; Free Yourself

The thought that cash is a wonderful asset is contrarian to the general idea that in this low interest rate environment, the return on cash is horrible. Actually, the return on cash is much greater than the poor annual percentage return. Cash has great utility outside its low annual return. Cash is liquid which is one of its great attributes. An asset is liquid if you can turn it into spendable cash quickly at the price or higher than you paid for the asset. The 90-day, US Treasury Bill is used in financial models as “the risk-free asset”. It is risk free because there is no risk of default by the holder, and you typically get all of the money back plus interest after 90 days. Real Estate, common stocks, private company common stock, are by contrast illiquid. If you need the money invested in these assets quickly, it is doubtful that you could get the cash out of it fast and at the price you invested. These need to be liquidated thoughtfully over a longer period of time. Cash has an important place in every investment portfolio for a natural person as well as a business.

Berkshire Hathaway 2021 Annual Meeting was this weekend and streamed live on Yahoo. Warren Buffett and Charlie Munger, two of the world’s greatest investors, talked at length about the company’s cash position. Berkshire has total assets of $884 billion, $142 billion of these assets are invested in 90-day US Treasury Bills paying almost nothing, .01%. This represents 16% of the total assets at Berkshire. The company has this money available for opportunistic acquisitions and an unforeseen event, a Black Swan, that could roil the financial markets. It is both an opportunity and an emergency fund for when cash needs to be available quickly. This cash will certainly be deployed to generate increased asset values for Berkshire. While the interest return on this money is historically low, the liquid cash is a strategic asset for Berkshire Hathaway to grow their business in the future.

Every individual should have an emergency fund as a part of their investment portfolio. It is the first money a young person should put away as a start to their investment plan. The emergency fund should be 9 months to a year of your after-tax cost of living. This is where you go if you lose your job or have a medical emergency. The fund should be in an instrument that is very liquid like a savings account, certificate of deposit, or a Treasury Bill. There should be no risk of loss and immediately available so you can put your hands on it when you need it. While the emergency fund makes rational, logical sense, the power of the fund is its psychological effect on the holder.  An employee with an emergency fund doesn’t worry about the ramifications of a lost job. Nor do they feel like they can’t speak their mind concerning ethical and moral issues at work. Well-funded workers can focus on sharing their unique ideas in the workplace without worrying about becoming destitute if they offend someone and lose their job. The emergency fund is a strategic tool for great employees and career climbers that enables them to personally progress by freeing them to be uniquely, authentically themselves. It is a powerful tool!!