The Importance of Extra Cash you have
I disagree with the advice that having uninvested extra cash means you’re not following the basics of investing.
Holding extra cash offers several advantages, and it can actually lead to making much wiser investment decisions.
In other words, rather than rushing to invest all your available cash into stocks or funds,
I highly recommend saving at least 6 months, and ideally up to 2 years, of your living expenses in cash reserves.
For example,
if your monthly living expenses are 5 million KRW (about $4,000),
then you should aim to save at least 6 months’ worth of cash, or 30 million KRW (around $20,000),
in an account that’s readily accessible, like a savings (or fixed deposit) account.
In the U.S., there are checking accounts, which allow easy access to funds, and savings accounts, which offer some interest.
Personally, I maintain at least 6 months’ worth of living expenses, and sometimes up to a full year’s worth, in a savings account.
The money in a savings account typically has more restrictions on withdrawals compared to a checking account
https://www.americanexpress.com/en-us/banking/online-savings/account/
For example,
you may be limited to fewer than five transactions per month, or transferring funds could take at least 1-2 days.
Despite these limitations, I still recommend using a savings account.
One of the biggest advantages of having extra cash in a savings account is that…
1. You won’t feel rushed to make investment decisions
No matter how attractive a fund or investment product may be,
having extra cash gives you more options.
As a result, even when a good investment opportunity arises, it prevents you from making quick and impulsive decisions.
When you don’t have cash on hand, there are always more things you want or need to spend money on.
Those who’ve saved money before will likely understand this feeling.
However, when you have extra cash, it doesn’t get spent easily.
That’s because you’ve invested a lot of time and effort in saving that money,
and the value of that money carries a certain weight, which keeps you from spending it carelessly.
Therefore, money that holds this intrinsic value doesn’t get frivolously spent,
even if it’s in an account where you can access it easily.
This means you’ll make more thoughtful decisions when investing.
Even if the money is used for something other than investing,
you’ll end up spending it on truly necessary things, avoiding purchases that you might regret later.
2. It reduces everyday stress, anxiety, and pressure
In the U.S., layoffs aren’t considered a big deal.
You can be let go from your company at any time, and you can also find a new job relatively quickly.
However, job insecurity is not something that anyone can take lightly.
Especially in big companies like Google, Facebook, and Netflix, hiring and firing are heavily influenced by economic trends and corporate performance.
The only real way to handle this uncertainty is to be prepared.
It’s commonly recommended to have at least two months’ worth of living expenses set aside as an emergency fund.
These two months represent the minimum time it may take to find a new job after being laid off.
That said, having at least six months’ worth of cash reserves to cover job insecurity
can free you from day-to-day anxiety and pressure.
Moreover, having extra cash gives you peace of mind when job hunting,
allowing you to avoid the disadvantage of having to accept the first job that comes along.
Layoffs are ultimately out of your control. The best thing you can do is be prepared for them.
3. You can reduce unnecessary spending
Ironically, having extra cash makes you less likely to buy unnecessary things.
This was true in my experience.
When I didn’t have extra cash, every item I saw felt like something I needed to buy.
Even things like travel packages or luxury bags
—when I didn’t have the money, they seemed so desirable, and I wanted them badly.
But once I had saved up extra cash in my account, my urge to spend significantly decreased.
The items I used to see no longer whispered, “Take me home.”
This is something you really notice when you have extra cash.
Both ‘The Psychology of Money’ by Morgan Housel and ‘The Nature of Money’ by Chairman Kim Seung-ho mention this:
Wealth is not about how much you earn, but how you spend it.
When I read articles about single women in their 20s,
earning less than 30 million KRW a year ($30K annual), but managing to save up 100 million KRW ($100K)
it makes me nod in agreement.
In conclusion, holding extra cash isn’t just about missing out on investment opportunities.
It’s actually a way to make wiser investments and maintain financial stability.
Especially in today’s uncertain times, this financial cushion plays a major role in both personal life and peace of mind.
Ultimately, the basics of investing start with saving wisely and spending carefully.