A Fortress for a Complete Unknown

To invest and plan is to come to grips with the U word: Uncertainty.

Uncertainty keeps life interesting but can also be scary when all we want is a little assurance that things will be okay.

Medical bills, home or auto repairs can compromise a personal financial plan.

Losing a large customer or navigating an industry-specific headwind can throw your company’s revenue and margins out of whack in a hurry.

Stowing away excess cash may seem like a waste, but cash serves an important utility.   

It’s tempting to invest excess cash in higher-returning assets but trust me on this one. Before you take on more risk, you need to prioritize building up a minimum level of cash to weather the impact of threats to your personal and business planning.

How much cash to keep on the sidelines? For your personal plan, anywhere from 3 – 6 months of core spending (the essentials) is an effective starting point.

For your business? This is where things may vary a bit. High customer concentration, lumpy, seasonal or highly cyclical revenue may warrant higher cash reserves.

At a minimum, you should aim for two months’ worth of operating expenses though many business owners target closer to 3 – 4 months. A line of credit can provide an additional bridge during a cash crunch.

Need to tap into your fortress of cash? No problem. Rebuild it over time. Better to replenish your cash reserve than to pay 25% interest on a credit card balance.

And holding cash doesn’t necessarily mean leaving it in your checking or savings account. Cash that is used for emergencies should be invested in short-term, liquid instruments like treasury bills, money market funds or high-yield savings accounts which, at the time of writing this, are yielding anywhere from 3.75% - 4.5%.

If you started a business, you likely have a stomach for risk-taking but capital should not always be invested in the highest returning assets.

Ample, high-yielding cash serves an important role in not only building resilience for your business but freeing up your time and focus on growing the business.

You won’t be able to eliminate uncertainty but you can tame the beast with your fortress of cash.