What is Cash?
This is again a much harder question to answer than it seems. There are a variety of forms of money that you can safely consider a part of your Cash Reserves. There are also some that you should definitely not. Stocks, Bonds, most Mutual Funds, and Real Estate Equity are not Cash. They can be significantly hurt in a market downturn, and if this is when you need the money, then you are hurt.
But many other vehicles can be held as part of your Safe Money. We’ll first go through and look at the qualities of each type of cash reserve and then later we’ll discuss some common asset classes you might use for this purpose.
The ideal Safe Money holding would be best at all of the following criteria:
1) Safety – You can absolutely not afford any loss of principle in this area of your stewardship. It must be secure. The word might be deceiving, however, because the safety that you achieve from loss of principle in Dollars could be Risk that you are taking on in the form of Loss of Purchasing Power through Inflation.
2) Liquid – You need to be able to access this money in a very short period of time for any reason.
3) Yield – You’d like this money to earn as high a yield as possible while retaining the first two characteristics.
4) Tax Benefits – You want to keep the most money after the government has gotten involved.
5) Liability Protection – You’d like this money to be protected from aggressive lawsuit.
One problem you’ll quickly discover is that there’s not one product that delivers perfectly in all of these areas. Therefore you’ll have to have a mixture of products to perform as your cash reserve and safe money war chest.
We suggest a four tiered system of Cash Reserve for the Trunk of your Fruitful Tree:
1) Tier 1 – Your Checking Account(s). These are the accounts that you use on a day to day basis. You and your spouse might use the same account or each have a different one. This is familiar to everyone, so we won’t go into a lot of time here, but obviously this money is extremely liquid and accessible. You want to keep enough here to more then cover your monthly expenses. You will probably earn little to no yield on this money and have little other protection or benefits.
2) Tier 2 – Your Rainy Day Fund. This is where you keep money that you don’t need on a normal basis, but that you can easily dip into for the minor emergencies which frequently pop up in life. You probably want to keep a month or two of savings here. You want to earn a little higher yield on this money but still have it be very liquid in case you need it fast.
3) Tier 3 – Your Wealth Gate(WG). In short, this tier separates the savings that you need to consume in your life (because minor emergencies are inevitable) from your Storehouse Savings and investments which will build your wealth. It should be an account that can well handle multiple inflows and outflows. We’ll talk in greater detail about the purpose for your WG in the coming days.
4) Tier 4 – Your Storehouse. This is where most of your “Cash” is stored. It needs to be available for emergency, but because you have the other two tiers, it can be slightly less accessible. Because of this, you should expect to achieve a higher yield and receive other advantages.
Tomorrow, we’ll discuss different types of Safe Money Vehicles.
Photo credit: Darren Hester