Do you know why fund managers are told to put at least 80% of the fund they managed invested? It’s simply because cash uninvested is effectively losing its value every single day.
Liability in this context refers to something whose presence is likely to put an individual at a disadvantage.
It is common sense that having too much debt is a bad thing, how about having too much cash? Yes, it is equally bad.
Cash itself is being consumed by inflation when it is left sitting under your bed or in your bank’s low interest savings account. Let’s say the average inflation is 2% per year and the savings account interest is 1% per annum, you are effectively incurring a loss of 1% per annum just by leaving them untouched in the bank. This is the cost of holding cash.
As a result of not spending to seek monetary growth, you closed the chances of opportunity when you have decided to spend on your savings account or the piggy bank underneath your bed or the small safe in your wardrobe.
The lost profits that would have been yours, if you were to spend that cash on an investment property could provide you a 3.5% rental yield per month and 5 % capital gain when you sell it. This untapped profit has become an opportunity cost.
Sometimes a pay increment may not be a good thing when you do not know how to spend your money wisely. Being complacent and not putting in enough thoughts on cash management, since there are excess cash to fall back on, has turned cash into a form of liability as you are not gaining wealth and valuable experience while owning it.
Do you know that 70% of rich families lost their wealth by the second generation in America? or lottery winners who blew it all in days? These are extreme example of very poor management of abundance cash is indeed a liability rather than an asset.
The right balance
In order to achieve the right balance of uninvested cash, you need time to figure out that answer. Only you have the answer to this magic number.
Ask yourself the following:
How little cash you can live with after covering your usual expenses?
Once you have found the answer, spend the excess cash on investment products that suits your needs; ranging for high interest deposit, funds, stocks, start-ups or real estate. Spend more to earn more. Hence, by keeping your cash low, you are forcing yourself to be hungry for greater growth, improvement and success!
Set yourself free from the liability of too much cash on hand!