To enjoy a successful retirement and a have a satisfying lifestyle it’s important to have access to different kinds of money. This includes emergency funds, money that’s invested with high liquidity, money that’s invested for the long-term, money you can readily invest, money that you can help a friend out with, and money in another stable currency.
Having different kinds of money is different from investment diversification. There, the aim is to decrease risk. With having your money available to you in multiple forms you are giving yourself more options with a lot more flexibility.
1. Access to Cash
Few of us have enough, easy access to cash. I’m talking about the kind of cash you can spend readily without missing it.
Usually out financial advisors urge us to invest idle cash. They aren’t wrong – idle cash won’t earn you money but not all your money needs to earn you a return.
Cash in the House
Let’s start with simple, good old currency. You should have some cash around the house.
This is convenience money. Money you can have access to without having to go to the bank. I used to have around $10k in the house but I got lazy and started spending it and, eventually, never replaced it.
It’s okay to spend it – don’t let that discourage you. But it’s a better habit to replace it soon after.
I prefer to keep this money off the books. It decreases the complexity of budgeting. So, in my YNAB category of cash, I don’t include this money.
Cash from the ATM
Power outages and terrorist attacks aside, getting cash from the ATM is a huge pain in the ass. Back in California I usually didn’t feel safe going to the ATM at off-hours to withdraw large sums of cash.
Even in safer cities it can be a hassle to get into your car, drive to the bank/ATM, park, get the cash out, and then store it.
But it’s still good to have access to an ATM. You can withdraw $1,500 or so fairly easily. I prefer to have no limit on my ATM withdrawals though the ATM machine will often limit you.
This is why I have a buffer amount in my checking account. If I need to go withdraw cash then I don’t want to ruin my budget and have bills bounce. Keeping a little extra in the checking account solves this problem.
Buffer Cash in Checking Account
I keep about $10k cash in my checking account. I don’t have a savings account. This buffer account has helped me out a lot when I’ve made budgeting errors or needed to cover something urgently outside of a financial emergency.
An emergency fund should really be a last resort access.
Cash equivalents like gold and silver are indirect ways of holding cash. But you need access to a place that will do the exchange regularly without getting ripped off.
I prefer other cash equivalents like watches, jewelry, tools, liquor, and high quality furniture. These items continue to serve a purpose, unlike bricks of precious metal, while being easily converted to cash.
Any jeweler will take a Submariner or a Speedmaster off your hands for $2,000-3,000. And you can easily find someone who will pay you good money for a bottle of Rip Van Winkle.
I don’t think you have to get super fancy here. If you’re a tool person then get some solid hand tools or high quality plug-in tools. If you’re a jewelry person then go for some precious metal items or a few heavy, well-known watches. Enough for $10,000 worth of convertible cash is decent.
2. Emergency Funds
I have never had enough in my emergency funds. That’s been one of my personal frustrations.
And when I thought I had enough, I found out the hard way that I was wrong. The most recent example was my ordeal with the medical board where I had to return from an overseas trip.
Emergency funds don’t need to be held in cash, wrapped in plastic, and placed in the toilet tank. They can be in your savings/checking account or a money market account.
Even a CD might make sense as long as you leave room for any potential penalties for early access.
For a single medical professional it’s good to have somewhere in the $30,000 range if you are a frugal person. If you have a family then $50,000 might be better.
3. Money to Give Away
You know when your friend needs money to deal with a shitty situation? Or your family needs an expensive, necessary medical procedure? Wouldn’t it be great to be able to give them the money they need?
Not lend them the money, but gift it to them. They can pay you back, sure, but if they didn’t you wouldn’t miss it.
If more of us reached this financial position in life then we could do a lot for those around us. This would create a more stable economy and it’s contagious enough that it would get passed down from person to person.
$10,000 can solve a lot of problems for many people. I could part with $5k readily now but I’m not at the $10k mark which got me thinking whether I’m really as financially secure as I’d like.
4. Invested Money
It’s good to invest excess cash because idle money tends to lose value due to inflation. This isn’t the case for a person holding cash for valid reasons, such as when you own your own business or want to have a buffer as in the examples above.
Inflation doesn’t normally happen overnight, it takes a few years for your money to lose spending value. But the busy medical professional can see 5 years flash before their eyes quickly.
Securities investment are both liquid and over a long enough time period they will protect against inflation.
High Liquidity Investments
Investment with high liquidity are those which you can readily sell. Think stocks and bonds.
In a strong economy like the US, this allows you a lot of opportunities. Because the securities markets will spend more time being positive than negative, you can cash out your investments if a better investment option presents itself.
But if your money is tied up in illiquid assets then it might be hard to access it timely. Even worse, if you desperately need access to it then you’ll have to sell out of your securities funds at a loss.
Some illiquid assets are worth holding because they decrease your risk in other ways. A primary residence and some real estate investments are generally illiquid. Well, maybe not in a market like NY or SF but for the most part, I consider real estate as illiquid.
Cars or motorcycles are illiquid in most markets. But not so with small trucks and scooters. In some countries a small truck or scooter can be as liquid as cash. So it makes sense to understand your market.
The reason illiquid assets are worth having is that the illiquidity often fetches you a higher rate of return. If not a higher rate of return, it might protect that asset against certain short-term market risks.
5. Money to Invest in a Business
I’m not talking about Angel investing or VC investing. But it’s good to have some money on the side which you can invest in a potentially lucrative business.
One of my friends who is an avid rock climber invested $150k with some friends who were opening a rock climbing gym. These are very expensive gyms to open and this business couldn’t get the last $150k together to make the deal happen. She continues to profit nicely from this opportunistic investment.
For you a business opportunity might be a rental property. Should there be a sizable drop in a particular real estate market then you can capitalize on it.
But don’t rob Peter to pay Paul. If you cash out your securities investment in order to invest in a business opportunity then you are lowering the future income potential from that investment.
6. Money in Another Currency
If you can keep some money in another currency outside of cash, it will help diversify your money possessions. I’ve read about some individuals opening safe deposit boxes to hold actual foreign cash currencies but I think this is too cumbersome.
It isn’t too hard to cross a border and open a savings account in another country. Canada is a favorite one and so is Australia. These two countries have decent fiscal policies which should withstand any US shenanigans.
The best way to hold this money is to either invest it in another country or consider a savings account or CD.
A rental income property in another country might make sense if you understand the local laws and have help on the ground. If you have to fly back and forth to take care of your foreign real estate then your profit margins are going to get destroyed.
7. Money You Can Borrow
My favorite way to have access to borrowed money is through a credit card. A HELOC is another one but the application process for it was a huge pain in the ass and I gave up.
I haven’t yet come up with a good enough reason for having access to money that you can borrow. But I’m sure I’ll eventually come across one.
In theory, the money you saved is very valuable and if you are forced to spend on something when your situation is precarious, it would be better to take advantage of debt. The debtor is charging you a hefty percentage and willing to take the risk on you.
Currently, as I’m in my 30-day license suspension, I don’t exactly know how things will play out when I go to resume my work. I am putting most of my spending on my credit card. If shit hits the fan then I buy myself some time by making minimum payments, until I figure things out.
Priority of Different Forms of Money
My friend M. always says that she wants to be wealthy enough to pay for anyone in a checkout line. I get that. It’s having enough financial security that you can spend your money on others.
Most of us can’t have all these different forms of money overnight. Each has a priority that’s different from person to person.
An emergency fund is a great thing to have because it decreases your stress. But if you have a ton of debt then it might make sense to pay that off first before accumulating cash equivalents like Rolex watches.