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You Probably Need More Cash
Investing isn't the same as saving cash but it was easy to convince myself otherwise.
When I graduated college there was a maniacal focus on making money and stuffing it away as fast as possible. I wanted my snowball big with a long runway. But the truth of compounding whether it is snowballs or capital, you can’t make investments with a long time horizon if you are going to need the cash before then.
It’s embarrassing to write but I have learned more than usual lately, the value of a healthy cushion of cash savings.
It strikes me as common sense but for some reason, I never paid “a cash cushion” any more attention than lip service. I have spent the past 8 years of my life working to try and improve my investment skills however, I have probably been lacking the desire to get better at planning for my financial future, which has second-order consequences.
After graduating I made it a point to put almost all of my extra cash into the market, I assumed I wouldn’t need it anytime soon which to me meant the next few years. But when I was younger I never met a dollar I didn’t want to invest and this ambitious focus blinded me to asking the internal question, “Are there expenses I should be forecasting in my future that I should be planning for now?”
Why would I? Isn’t investing the same as saving anyway? No.
I was buying all these stocks so I wouldn’t need to worry about paying for big items in the future. And it’s been true. I have been able to afford them. But, the timing of having to “raise cash” has me reassessing my entire financial planning.
It is assumed that when you first set out on your own journey you are only working with the money you do not need for the immediate future.
When I started my journey I skipped over this because it was boring and I didn’t want to save cash, I wanted to buy stocks.
This negligence has been the cause of my newfound education in cash management, and the importance of maintaining a higher personal cash balance if you want to truly make long-term investments.
It’s one thing to have the desire to perform at a certain level but it’s another thing if you have the discipline to set yourself up for success.
For me, the desire is there but the discipline was not. By letting the little habit of pushing personal savings off in order to fund “long-term investments” grow, I found myself having to raise cash at the worst possible time.
Forced seller. Personal Margin Call. Dummy. Whatever name you like, I was there and I deserve the tomatoes for it. It was so easy to convince myself that “investing was saving” and this young naivety taught me a real adult lesson.
I find it comical that when I look at companies I love a healthy cash balance but I neglected to incorporate this into my own life.
This hard lesson could have been much harder though so I remain grateful that I was taught something and it didn’t hurt me too much.
As I sit here today I speak from a place with deep respect and admiration for individuals and companies that have had the discipline to keep that emergency fund stocked. One can plan with much more clarity when they know they have the liquidity to fund all eventual realities and not blink an eye. It is a power position and one I underestimated but will no longer.
If I had to go back and give myself a little bit of advice when first starting out I would have given him this list of cash importance, in order.
First, create a large enough cushion of cash to last AT LEAST 6 months expenses, at all times. Second, think about larger expenses you are going to be on the hook for in the next 3 years. Third, add an extra 10-20% for a margin of safety. Finally, after all of this is met, then and only then are you allowed to make long term investments.
To ensure growth one needs to first be in a position to grow.
Using the moat and the castle analogy from studying competitive advantage. Your investments are the castle but the cash savings preventing attacks (expenses) are the moat and for any survival to occur the moat needs to be impenetrable.
Most of you are probably reading this with laughter as it is such a simple mistake to make. In that case, I hope you enjoyed reading about the hard lesson learned.
For anyone else in my similar position, the answer seems simple, as much fun as it is to buy stocks, it might be time to reassess the current expense outlook and maybe update some priors that ensure there will be no need to raise cash from investments during a suboptimal time.
My current 3-year outlook resembles nothing of the same from 3 years ago. The new outlook does have bigger expenses which means it’s time to beef up the savings account a little more. It was time for me to outgrow the same expenses planning strategy that I had when I lived with Mom and Dad.
Well, better late than never.
Hope this helps.
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Please be advised, Wall St Gunslinger is not an investment adviser and does not give personal investment advice. All content is for educational and entertainment purposes only and should not be interpreted as anything other than such. Investing entails a lot of risks and should be managed appropriately. Please do your own research and consult with an investment professional before making any investing decisions. Thank you.