Establishing significant liquid cash reserves is the 3rd step of the 4×4 Financial Plan and, frankly, it could easily have been the 1st step as it is so critical to the success of your Financial Independence. Why? We need cash reserves for two reasons:
- When Things Go Bad
- When Opportunity Present Themselves
Unfortunately, most people live paycheck to paycheck. When something goes wrong they have no protection. At best they will rely on their credit cards to help them through the situation. Credit cards, a home equity line of credit, these are not cash reserves. These are debts often associated with very expensive interest costs. When things go bad having a large some of accessible cash will help you to weather the storm. It will give you peace of mind and help you to remain calm and under control in a situation.
Conversely, when opportunity presents itself having significant liquid reserves will allow you to take advantage of the situation. Without these reserves you would just have to let that “great deal” pass you by. Everything changes when you have significant liquid cash reserves. Not only can you take advantage of the opportunities you find, I believe that if you have the cash that opportunities will actually present themselves to you.
The Miracle of R.A.S.
Have you ever purchased a new car? Then, once you own that car you start to see the exact same car; same make, same model, same color and style….everywhere! Similarly, once you have your first child, you will see children and parents everywhere. This is the miracle or R.A.S.
R.A.S. is an acronym for Reticular Activating System. This is a function in our brains that allows us to focus. If you think about it, we all have 5 senses; Seeing, Hearing, Smelling, Tasting and Feeling. Our body’s sensors take in information about all of these inputs from the outside world 24/7. If you tried to focus on all the data these sensors are transmitting to your brain you would, well, go crazy!
As you read this, you are seeing, but you are hearing, smelling, tasting and feeling as well. Without the ability to focus on seeing, however, you would never be able to understand what I’m writing. R.A.S. makes this possible.
What does this have to do with cash reserves? I believe that opportunities to make money are everywhere. They are all around us “if” we can see them. With significant cash reserves and R.A.S. you “will” see these opportunities everywhere and all of the time. Not having cash reserves will blind you from all the opportunities surrounding you. Having significant liquid cash reserves will enable you to see them. Thus, those opportunities will present themselves to those who are focused and enabled.
What is “Significant”?
Significant is relative to your income and expenses. To keep it simple, I suggest having somewhere between 4-12 months of your net income in reserves. If you are earning $5000 a month, then we are looking for $20,000 to $60,000 in reserves. This buys a LOT of peace of mind as well as providing you with a good amount of opportunity.
What are “Liquid Cash Reserves?
In the context of “The Perfect Investment”, cash reserves is money that is safe and liquid. Generally, this means you will be giving up high rates of return in exchange for safety and liquidity. That said, there is a way to earn good returns and still maintain to safety and liquidity. Plus we can do this in a tax-favored manner and with very little involvement (passive).
If you want to learn about a Better, Smarter, Safer Way to obtain your Significant Liquid Cash Reserves what this short video by selecting the link below.