Make sure you always have cash available

Make sure you always have cash available
14 August 2013

In 1998 Long-Term Capital Management (LTCM) lost $4.6 billion in less than four months. Although the hedge fund was led by Nobel Prize winners (Myron Scholes and Robert Merton), noted professors, a Federal Reserve vice chairman and well-known Wall Street arbitrage experts, it made one of the most basic -- but costly -- investment mistakes.

LTCM ran out of cash, all of their capital was invested and one of their bigger holdings share price started to severely drop. The hedge fund’s managers found themselves caught in a very bad investment. To rectify the cash flow problem they had to sell off sound investments. In the end, they turned one loss into many.

This is a classic mistake we make when thinking about money and how to grow our wealth. Invariably the majority of people believe we have to be getting a return on our money and cash should be fully invested.

Cash is king

I hear so many people say: “what is the point in saving when the current interest rates are so low?”

Guess what I’d rather have a 1.5% return on my savings and free cash available than not have any cash available at all. 

Thirty one (31) percent of respondents to a cashy poll indicated they had less than $150 in savings and Fifty two (52) percent said they have less than $1,500. These are very disturbing numbers.

It doesn’t matter if you are an investment fund, company or individual. Things happen in life, sales slow down, just look at once dominant Blackberry that now faces oblivion, share prices dive – any investment manager knows it could be catastrophic if they do not retain a percentage of their fund in cash. 

Changes happen in our personal life such as loss of job, divorce, or ill health. If we are ‘lucky’ the changes are not as severe, the car breaks down; the air-conditioning does not work and is not under warranty. Friends get married and we have to buy a present or outfit to wear at the wedding. Life happens! And the less we have in savings the less we are able to deal with it.

It’s not about income it is about where the money goes

Those people that moan to me about it not being worth saving are the very ones that in the next breath say they ‘can’t afford to save.’ But the truth is it is not about how much we have coming in; it’s more about where you choose to spend your money.

Yes I get that the cost of living is going up and wages are pretty much stagnant. Yes I get that many people live on the breadline. But I do not get the fact that those very same people have no idea where there money goes.  And once you know where your money goes, by tracking it, you are far more able to squirrel away even a small amount every day to build your savings.

Failure to do so just leads to a feeling of insecurity and stress. The more you take control of your finances the less the risk of borrowing at exorbitant fees and living in a spiral of debt.

Some of the smartest people I know can have trouble managing their money (just like those two Nobel Laureates). Families and individuals need to open up and get real about their situations in order to tackle financial problems.

The good news is it is not difficult to manage a budget, nor is it boring. In fact managing a budget and seeing a nest egg build up is one of the most rewarding things in life.

Do you have a personal cash flow problem or have overcome one? 

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Author
Head of Behavioral Finance
cashy
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