One of the most valuable assets to have during a time of uncertainty is cash. Balance sheet cash can be a lifeline to a business during a financial crisis when other forms of funding dry up. Meanwhile, having an ample emergency fund can sustain a household during an unexpected job loss or health crisis. Finally, investors will be happy to have some cash in their investment portfolios during a stock market crash, as that will give them the funds to buy stocks during the decline. Because of how precious cash can be during times of financial stress, many have said that cash is king.
The phrase means that having liquid funds available can be important because of the flexibility it provides during a crisis. While cash investments -- such as a money market fund, savings account, or bank CD -- don't often yield that much, having cash on hand can be invaluable in times of financial uncertainty.
How much cash is too much?
Because cash is such a low-yielding investment compared to other options, there's a lot of debate about how much cash a company, household, or investor should hold.
For companies, the amount of cash they should hold depends on their industry's cyclicality, the overall strength of their balance sheet, and their funding needs. Companies in highly cyclical industries with weak balance sheets and large capital spending programs should carry more cash than those in stable sectors, with strong balance sheets and limited capital needs. Cash also gives these companies the flexibility to make acquisitions or other investments during periods of market turmoil. Investors need to keep those things in mind when looking at a company's cash balance.
Similarly, there's a lot of debate within the investment community about how much cash to keep in a brokerage account. Younger investors who steadily deposit new funds might not want to hold any cash. On the other hand, a retiree who relies on their portfolio to meet their expenses might want to allocate enough money to cover their spending for several months so that they don't need to sell shares at lower prices during a market sell-off. Peace of mind and personal preference also play a role here, as some investors might want to keep more cash on hand as a cushion in case of a market meltdown.
Finally, there is a bit more consensus when it comes to household cash savings. As a general rule of thumb, a good target is to have three to six months' living expenses set aside in case of an emergency. Those with a stable job and in good health can opt for less, while freelancers might want to consider having even more cash on hand.
Having cash can prove to be invaluable
When the going gets tough, cash can be a treasured asset. Cash gives businesses, investors, and individuals the financial flexibility to get through tough times and potentially take advantage of opportunities. Cash deserves the royal treatment it receives -- there will always be a time when it's a precious thing to have on hand.