CASH AS AN EMOTIONAL STABILISER

EVEN if cash isn’t king all the time, it can play a central role in our wealth building endeavours. What is your personal relationship with cash? Are you two ships that pass in the night, never to make lasting contact; or are you on again, off again acquaintances; or are you Siamese twins, perpetually fused to each other?

To find out, please monitor your internal reaction to these words: “scarcity” and “abundance”.

If you’re like me, then upon mouthing them your mind might have transported you to two different periods of life when you went through a time of want and another season of plenty... in either order. Most of us have, at different points, gone through these valley and mountaintop experiences: stressful scarcity and calming abundance.

Your periods of financial scarcity were perhaps worsened by thoughts running amok in your brain of letting down the people you love most and those who rely on you, while your stretches of financial abundance were sweetened knowing you had sufficient resources to be a blessing to others and to enjoy your version of the good life.

You’ll notice that those two possible mental states are independent of any specific amount of money. I find it intriguing that some people can feel poor with a million ringgit in the bank and others can feel rich with a thousand ringgit in their account.

Something is at work here that’s far more pertinent to the human condition than any arbitrary wealth level. I believe it’s linked to whether we’re growing, shrinking or drifting in our personal assessment of who we are and how we’re doing, and to our realisation that our economic lives are growing better or worse or whether we have zero semblance of control over our personal wealth trajectory!

If you’ve spent your life oscillating from one extreme of financial liquidity to the other, then I believe it’s time for you to proactively take charge of your remaining decades by abandoning the seesaw of poverty and riches that you’ve perhaps been riding up and down since your youth, and commit today to a soaring sojourn of focused financial fortitude.

If the idea of taking charge of your financial destiny appeals to you, if you truly crave incremental financial robustness, then I urge you to commit to learning these three lessons:

1. If you consistently spend less cash than you earn, you will grow richer — that’s inevitable;

2. If you build a solid emergency buffer fund (EBF) of cash that is separate from the cash within your growing savingsinvestment portfolio (SIP), then you will be much less likely to freak out and fall apart when an emergency arises — that’s predictable; and

3. If you always maintain healthy cash levels within your SIP even as you also consistently and courageously invest in better (than cash-yielding) savings and investment asset classes like fixed income (bonds), equities (stocks), investment real estate (REITs or real estate investment trusts); and alternative investments (like structured products, derivatives, private equity, forex and commodities), then you will probably succeed in growing rich slowly — which would be outstanding.

Confession: I know nothing about growing rich quickly, so I can’t provide you with any value-added advice in that department. Sorry!

Instead, my three teaching points above on cash and cash flow are tied directly to growing rich slowly through the stabilising effect that sufficiently large layers of cash have on our emotions. This practical facet of behavioural finance is sadly lacking in most classroom discussions of financial planning. It shouldn’t be!

Cash levels, you see, are determinants of our capacity to accept investment risk within the riskier, more volatile components of our SIPs. For example, in my practice if a new financial planning client were to confide in me that he or she has, say, RM2 million to allocate into a portfolio with a 20-year time horizon that will hopefully grow through viable capital allocation choices to RM5 million to RM8 million, I will spend a lot of time up front trying to assess the client’s current and future cash usage, his or her available and ideal cash buffer size, and required cash-calming needs over the next two decades.

Beyond the initial analysis and ensuing portfolio construction, I tend to advise such a client to build growing layers of protective cash that will stabilise his or her emotions and boost the likelihood of not just surviving but actually thriving in the years ahead. Keeping an eye on key cash levels and cash percentage allocations will be crucial if the intensity of the next few financial crises we suffer through rises, and if the interval between them shortens.

So the best way I know for us to strengthen ourselves financially is to fatten our various cash cushions even as we train our minds and hearts to cheer intermittent market collapses because such dips or swoops provide us with golden cashutilising opportunities to “buy low”.

Now, in closing, I urge you to look at how much cash you have today and to think about how you may — legally and ethically — nurture that amount to grow as your other inflation-beating, more volatile investments soar and plummet, only to soar again, over many years of wealth compounding.

© 2018 Rajen Devadason Readhisfreearticlesatwww.FreeCoolArticles. com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may follow him on Twitter @RajenDevadason