When it comes to wealth building, different people have different ideas. Some people want to save as much cash as possible and obsess at the dollars in their savings accounts as a metric of safety, Understandable, sensible and somewhat useful, beyond having what is necessary for emergencies and even extra margin, savings in cash is not the path to wealth.
Why Cash Is Important
Cash still plays an important role in our lives for two reasons centered around liquidity:
- Living Needs: At the end of the day, we need cash or liquidity to survive. We cannot pay for groceries with equity. So it is important that at least an emergency fund of cash reserves exists for the unforeseen.
- Sideline Investment Money: Have you ever had an opportunity to invest in a great opportunity, but you either did not have the funds or they were tied in other investments? Not fun. Not having sideline money can literally cost millions in opportunities.
A Real Threat to Cash
Something threatens our wealth more than the internet company suddenly raising its monthly service or your car suddenly needing a new radiator. It’s more harmful than the periodic medical bill or any other financial surprise. This surprise should not be a surprise at all, which is encouraging for us.
It slowly devalues those dollars in your bank account right under your nose. Even as you are regularly making deposits and watching dollars grow, it is taking its cut, allowing you to feel wealthier when that is not the case.
It is happening around us, pushing the values of our homes up and raising prices everywhere. If you do not know by now, I am speaking of inflation, which threatens the traditional guidance that cash is king.
Russel Gray from Rich Guys Real Estate Radio reminds us often that as Americans, most of us are dollar-centered. Every part of our financial lives goes back to the dollar. As we shared in Dollars and Debt Debunked, the problem with that singular mindset is that the real value of the dollar continues to decline as it has for nearly 100 years.
How to Overcome Inflation
The goal of any investor should be 1) Preserve Wealth and 2) Create Wealth, in that order. We are talking about #1. After setting aside cash for liquidity, it is time to beat inflation. All that extra cash should be earning at least 3% to keep up or exceed the inflation rate, which is certain to rise at a higher rate with all this extra stimulus. People that know this are moving their cash to stocks, mutual funds and other funds as well as real assets such as real estate. I am invested in certain growth stocks also, but my primary focus is real assets (real estate).
Keeping an optimal mix between cash and other interest-bearing assets is important to beat inflation, the largest threat to your wealth next to bad financial choices altogether. Recognizing this, it is helpful to think carefully about the dollar-centered mindset we have grown to have and shift towards wealth creation using a portfolio of assets.
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– How To Use Your 401k To Invest In Real Estate
