It has been my experience that people who chase yields will ultimately be disappointed with their results. There is always someone who has done “better” in the time being measured. A simple example of opportunity is the business owner who can take advantage of 2-10, net 30. That means a 2% reduction in the invoice if paid within 10 days; or the net amount in 30 days. That 2% off is the equivalent of a very nice double-digit annual return. Having cash available enables the business person to take advantage of the discount.
The next time a retailer is offering “no money down” or no payment for 90 days or 0% interest, ask them how much of a discount they may give you if you paid cash. If they say none, move on! Cash normally commands a discount as the retailer usually sells the payment plan for less than full value.
Let’s look at our forever partner, the IRS. For every $100 of gain, the IRS can collect roughly $40 of that gain that is realized if occurring in less than one year. Being able to hold out to over a year for the realized gain, the IRS share can drop to the $20 range. Having money for opportunity outside a time sensitive choice enables investors to be more tax aware.
Using the S&P point to point (actual price from first trading day in 2000 to the last trading day in 2018), six of those nineteen years were negative for the whole year. Every year during this time, the market had negative returns for some time during the year. Having to access funds when the market is down takes money away when the market returns to positive territory. Watching trends and continually analyzing reports on individual stocks can enter both buy and sell zones. Having cash to step in for the buy zone helps position oneself for the potential upside opportunity.
I was shocked recently to read 16% (one out of six) individuals use their credit card on a rainy day.[i] That is a sad commentary on our “have it now” consumption, experienced focused economy. Depending on your credit history and score, the interest rate you pay can be in the teens or higher. Remember, you have to pay the tax first before you make the monthly payment.
A math example might be for a single tax payer with 2x monthly taxable income of around $3,500 per pay period. They would have to earn nearly 20%, pay taxes on their investment earnings to have sufficient left to pay a 15% interest rate on credit cards. Again, having cash for opportunities means avoiding the risk to achieve a 20% return, supports credit card payments. One of our big warning signs to individual clients is DO NOT carry monthly balances. If you have them now, stop spending and pay the balances off.
We try to help our clients have rainy day opportunity money available. We help avoid chasing returns and the associated risk. We take a beyond majority thinking approach to find ways to build blocks of capital from existing resources. I have written a few blogs around this topic. If you are interested in reading more you can look at the a few past blogs:
Becoming a Business Owner
Chasing Dreams, the Red Ball
Disappearance of Cash
Lemons Out of Lemonade
Doing Nothing- Proactive Tax Strategy
Stocks- Rocky Path
[i] Workers Get Cash for Emergency Stash, Anne Tergesen, WSJ 6.14.19 B5
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