Cash is an amazing thing and even the sound of the word evokes an all over body tingling to most people.
Cash is an essential part of a solid financial fortress and should be included in your long term financial plan. The old adage is true that “Cash is King” and this is especially true if that cash is used to buy distressed assets at a huge discount. The longer the sales cycle for an asset, the more valuable cash becomes. When you are selling stocks you don’t pay “cash” you click on a button and sell your stocks immediately and the money usually clears the next day. There is no costly waiting time as there is when you sell a property or even a business.
When you sell long sales cycle assets then cash can become an invaluable negotiating tool depending on the sales situation of the seller. Many people will tell you don’t keep much money in cash because you will make no money on the cash (or at least very little). This is indeed a short sighted view of money and opportunity. If I keep a good amount of cash parked in the bank, cash value life insurance, or even in a safe deposit box it is true your growth in those vehicles is on the low side and or no growth in the case of the actual cash. However, the very fact that I can access the money immediately and without having to sell an asset at a loss, to get the cash is invaluable.
As an example, you receive a phone call from your neighbor and he needs to sell (not just wants to sell) the house down the block from you and close in 3 days. You live on the block and are familiar with the house and are very confident that house would sell for $200,000 on the open market given a little bit of time to sell and to close. Your neighbor does not have the luxury of time to market the home and wait for a closing. Most of the retail real estate market deals with longer sale times and the buyer having to qualify for financing.
Your neighbor is pressed for time for any number of reasons such as financial, opportunity for him on the other side such as a new job or new life, and several other possibilities. He tells you that he needs to close in 3 days and if you can make that happen he will sell the property to you for $100,000 which represents a full 50% discount off of the retail price. (I have bought many properties at 20 to 50% discounts as have many people all over the country) Could you make that happen if you received that call today? If you had the cash you would write up a purchase agreement and send it over immediately to a title company with a rush close and pay them extra if need be to get it done. You then wire your funds to the title company and sign some documents and presto you own a $200,000 home for $100,000 which means you have a $100,000 equity profit. Equity profit is not cash profit but it is real wealth that you can convert back to cash if you so choose.
That money in the bank or your insurance policy earning .05% to 5% actually has the chance to close to double in 60 to 90 days when you resell the property. Any real estate investor will tell you that to convert that house back to cash will require some holding expenses, a little fix up, and selling expenses. When the home resells you might net $80,000 of profit. The original $100,000 of seed capital goes back into the bank or your cash value life insurance policy along with some interest that you should pay yourself for the loan. Now you are free to do as you wish with the $80,000 and put it into your 7 gears of wealth. Depending on what funds you used to close on the property you could owe short term capital gains taxes. (There will be exceptions to this however) You could also choose to hold the property and possibly obtain a mortgage from a bank or private lender to pull back out much of your cash. Then you could rent, rent to own, or equity share that property and sell out later for hopefully more money and at a more beneficial tax rate.
You see, access to cash in a hurry, combined with some education on your part on how to find undervalued assets can pay off handsomely over time. If you had all your money tied up in the market or fixed income assets then you could not take advantage of that unique opportunity that came knocking on your door.
That $100,000 of cash will buy every $100,000 or less asset on the market (property or business for sale) and it will buy most $110,000 assets, some $125,000 assets, a few $150,000 assets, and the occasional $200,000 asset because you can solve problems quickly with that fast cash. Rates of return are not always figured out inside of the product you are in but rather what can you do with that cash when the right opportunity presents itself.
What if it took two years for that opportunity to present itself? Would it still be ok to keep that safe money parked and available at a low rate of return? Of course it would! Never make the mistake of thinking that all your money needs to be invested or in fixed income assets such as bonds or annuities. Maybe you could educate yourself on how the distressed real estate and note markets work and spend a little time and effort on taking advantage of that market.
Cash parked in a safe, easy access place would also allow you to take advantage of the next stock market downturn. If you had cash and guts in ‘07 and ‘08 and decided to take that cash and invest in great companies that were way down due to more of the market than anything internal to the company, you would have made a killing. Nobody knows when the next market downturn will be but it is just a matter of time and those with cash and those who are willing to buy when blood is in the streets always create fortunes.
Easy, fast access to the coin of realm should be a part of your financial plan.