Cash is your opportunity insurance
Why you should hold onto a little extra
Hi, Steven here from munny.club, a weekly newsletter where I share a different perspective on personal finance concepts. If this doesn't interest you or you don't find it valuable, you can unsubscribe at the bottom of this email.
Welcome to the first munny.club issue! This is a bit scary for me; I've been sitting on this idea for the last two-and-a-half years and finally got around to doing something with it. So, if you have any thoughts or feedback, I would love to hear it! Whether that's criticism, questions, things you're hoping I cover, I want to know. I think Substack lets you leave a like too. Onto the writing.
I should probably preface this, and all notes, by saying something to the effect of none of this should be considered financial advice. These are my thoughts, opinions, and things I do.
One of the first things you learn in the world of personal finance is this idea of the emergency fund. It is recommended you set money aside, usually in the amount of 3-6 months' worth of expenses, to keep you covered in the event of an emergency. In this way, cash is framed as your "emergency insurance". This is an important idea and fallback to have, I'm not suggesting otherwise. What I want to propose in addition, as an alternative lens on cash, is that of opportunity insurance.
Life can be funny sometimes. Without expecting it, opportunities might appear in your life that seem financially interesting. Maybe it's a friend starting a venture that you believe in. Maybe the market has crashed (like it has in recent weeks) and you want to put in a little extra because you're optimistic about the future. People talk about how the biggest returns are to be made by investing through a recession, but my guess is most people aren't financially set-up to take advantage of these opportunities.
This is where your opportunity insurance comes in. By keeping a portion of your assets in cash, separate from your emergency fund, you will have some money available for life's positive surprises. It's not going to be easy to invest in these spur-of-the-moment ventures, and it will still depend on your personal risk profile, but I believe there will be times in your life you will regret not having this insurance.
Now for the challenging part of this approach: there is an obvious balance that needs to be struck. Keeping assets in cash has its own opportunity cost: it's not earning a return in the market and losing its value to inflation. Try to balance this out by only allocating 5% or so of your investing funds into a cash account for the special opportunities. Again, pick a number you're comfortable with and that doesn't impact your overall performance. These opportunities will be rare and not always lucrative.
Bonus Tip: This applies to your time as well. Consider having "slack" in your schedule to take advantage of unexpected opportunities, though those seem rare these days.
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I read every reply. Thanks!