How Can We Learn The Value of Cash?
Try telling your financial advisor that cash is important, and he’d probably ninja-star you with his breakfast bun. “Stocks earn you over 10% a year! Cash earns you less than 1% a year! Why would you hold cash over stocks!?” With his breakfast bun in hand, you took a bite and realised it was Tuna. Ew. Sure enough, the 9% gap will gnaw at us from time to time and there will be plenty of missed opportunities. However, I believe cash shouldn’t be measured in terms of losing its value to inflation. The value of cash is optionality. Cash doesn’t earn much today, but it gives us options in the future.
Warren Buffet once said, “Cash combined with courage in a crisis is priceless.”
Very little people will tell us that cash is important, and the rare ones who do are the people who have gone through a financial depression. We will not understand the value of cash till we learn how much we need it when we need it. There are many lessons in the world and while we’re constantly learning from someone’s lessons, some lessons have to be experienced before they can be understood. Imagine a 20%, 50% or 70% buying opportunity on some of our favourite assets and we can do nothing about it. That hurts. We’ve probably imagined it in some way, shape and form, but the gap between reality and imagination explains untold frustration.
We felt the immediate pain of losing out to inflation and less of the eventual pain in having limited options.
I believe part of this reason is that we underestimate long periods of time and overestimate short periods of time. When we’re waiting for a bus, the 5 minutes can feel long. We remember vividly how it feels to be anxious. However, if we’re on the bus with a 45-minute commute ride to the office, it feels much shorter as we are distracted by what we can do. We check through our emails. We read some articles and we stalk our colleague’s white fluffy pomeranian. We look up and soon realize that we’re only 2 stops away from the office. It is the equivalent of how a bad month feels much longer than a good decade. Imagine being reinforced with the idea for an entire month of how cash is earning you peanuts and how you could have done so much more with it.
It is difficult to manage ourselves when a reward is dangled in our face. It is the time when we discover how adjustable our financial boundaries can become.
The value of cash enables us to buy what we want when we want it. The flexibility and control over when we want to buy can be an unseen return on wealth. Big market drops is no longer a crisis to fear. It becomes opportunities ready for us to exploit. The edge from optionality allows us to buy cheaper assets. But as we all know it, freedom comes at a cost. In this case, the cost comes in the form of a fear of missing out in relative to another potential buying opportunity accompanied with not knowing when the big market drop is gonna happen. Maybe this is why we’ve been told since young to save for a rainy day. Let’s not underestimate the real worth of cash. Let’s not forget how much freedom costs.
