How to manage your cash effectively?



Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

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All individuals should have a cash buffer regardless of their financial situation. It is the absolute minimal level of savings one should have because it ensures that our basic expenses are met in the event we lose our income.

Apart from a cash buffer (to cover regular expenses), it is crucial to have a warchest as well as an emergency fund.

A warchest and emergency fund should not be confused with a cash buffer because they serve distinct purposes.

A warchest for example, is meant specifically for buying stocks during times of distress. It is an important account which all investors should have especially if you are actively looking for investment opportunities. 

Having a sufficiently large warchest available on hand will allow you to quickly buy up assets at distressed prices should the opportunity arises. The warchest enables you to act fast without having to liquidate any other assets or even tap on your cash buffer to fund the investment. For this purpose, a warchest should be kept separate from one's cash buffer. Using your warchest during market crashes will allow you to profit from panic.

Next, an emergency fund. The name is self-explanatory but it's important to not lump an emergency fund together with a cash buffer. An emergency fund is meant specifically for emergencies, while a cash buffer is meant for our regular day to day expenses. So, they serve two distinct purposes and therefore should not be treated and viewed together.

Lastly, some individuals may value having a cash account, which is a small sum of money used for investing regularly. It is ideal for individuals who invest regularly or who wish to dollar cost average. Setting aside an account meant specifically for your regular investments into the market is a useful option to have available. While it will require you to set aside more cash on top of an emergency fund, cash buffer and warchest, it is especially useful if you do not wish to time the market and would rather diligently dollar cost average into the market or a specific stock or asset.

In short,

1. Cash Buffer: to cover regular expenses
2. Cash Account: for dollar cost averaging or investing on a regular basis
3. Emergency Fund: to be used only during emergencies like a health or family crisis, etc
4. Warchest: for "crash" buying

Cash buffer covers regular expenses. Cash account covers regular investments. Emergency funds cover unexpected expenses. Warchest covers unexpected investments. Each plays a distinct and special role.

Having a cash buffer and emergency funds is an absolute necessity for anyone, regardless of whether you invest because it is meant to cover your expenses, whether regular or unexpected. It is something everyone needs and therefore should have.

Having a warchest is an absolute necessity for investors, because without a warchest, it is impossible to execute any investments especially during times of panic or crashes. While a cash account is optional since not every investor invests regularly, it is good to have one regardless, as you may wish to invest during regular times (not panic or crashes), and as such can tap on your cash float during such instances.

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Disclaimer:
The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

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